UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended January 29, 2010
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to _________
 
Commission file number 1-7898
 
 
 
LOWE'S COMPANIES,  INC .
(Exact name of registrant as specified in its charter)
 
NORTH CAROLINA
56-0578072
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
1000 Lowe's Blvd., Mooresville, NC
28117
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code
704-758-1000
  
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $.50 Par Value
 
New York Stock Exchange (NYSE)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
x
Yes
o
No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
o
Yes
x
No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x
Yes
o
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§1.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x
Yes
o
No
 
 
 
 

 
 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer," "accelerated filer,” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
 No

As of July 31, 2009, the last business day of the Company's most recent second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $33.1 billion based on the closing sale price as reported on the New York Stock Exchange.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS
 
OUTSTANDING AT MARCH 26, 2010
Common Stock, $.50 par value
 
1,443,389,268
 
DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Parts Into Which Incorporated
Portions of Lowe’s 2009 Annual Report to Shareholders
 
Parts I, II and IV
Portions of the Proxy Statement for Lowe’s 2010 Annual Meeting of Shareholders
 
Part III
 
 
 
 

 
 
 
  LOWE’S COMPANIES, INC.
- INDEX -
       
 
Page No.
 
 
 
 
 
 
   
       
 
 
 
 
 
 
 
 
 
 
       
 
 
 
 
 
 
     
 
 
       
   
 
 
3

 
 
Part I

Item 1 - Business
 
General Information

Lowe’s Companies, Inc. and subsidiaries (the Company or Lowe’s) is a Fortune 50 company and the world’s second largest home improvement retailer.  As of January 29, 2010, we operated 1,710 stores, comprised of 1,694 stores across 50 U.S. states and 16 stores in Canada.  Our 1,710 stores represent approximately 193 million square feet of retail selling space.

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

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

Customers, Market and Competition

Our Customers

We serve homeowners, renters and Commercial Business Customers.  Homeowners and renters primarily consist of do-it-yourself (DIY) customers and do-it-for-me (DIFM) customers who utilize our installed sales programs, as well as others buying for personal and family use.  Commercial Business Customers include those who work in the construction, repair/remodel, commercial and residential property management, or business maintenance professions.

Our Market

Using the most recent comprehensive data available, which is from 2008, we estimate the size of the U.S. home improvement market to be approximately $630 billion annually, comprised of $492 billion of product demand and $138 billion of installed labor opportunity.  Data from a variety of primary and secondary sources, including trade associations, government publications, industry participants and other sources was analyzed as the basis for our estimate.  This data captures a wide range of categories relevant to our business, including major appliances and garden supplies.  Based on the most recently available data, we believe that the size of the U.S. home improvement market decreased approximately 11% in 2009.

There are many variables that impact consumer demand for the products and services we offer.  Key indicators we monitor include employment, real disposable personal income, housing turnover, and home ownership levels.  We also monitor demographic and societal trends that are indicators of home improvement industry growth. 

§
Employment is an indicator of home improvement sales.  The forecasted average unemployment rate of 10.0% for 2010 from the February 2010 Blue Chip Economic Indicators™ is higher than the 9.3% average seen in 2009 and suggests that Americans will continue to face challenging employment prospects this year.
 
§
Although real disposable personal income continues to grow, it is projected to grow at a slower pace for 2010 than the long-term average annual increase of 3.4%, during the period from 1960 to 2009.  Real disposable personal income growth is forecasted to be 2.1% for calendar 2010, compared with 1.3% for calendar 2009, based on data from the February 2010 Blue Chip Economic Indicators™.
 
§
Housing turnover, which peaked in calendar year 2005, remains significantly below peak levels according to The National Association of Realtors®.  However, recent data suggests that housing turnover in 2010 will increase over 2009.

§
According to the U.S. Census Bureau, while U.S. home ownership levels over the past year have continued their decline from 2007, they remain above their historical average.  Home ownership provides an established customer base for home maintenance and repair projects.   The vast majority of our customers are homeowners and most are not willing to let what is often their most valuable financial asset deteriorate.

Currently, all of these indicators suggest continued weakness in consumer demand.  In this challenging economic environment, we are balancing implementation of our long-term growth plans with our near-term focus on conserving capital and maintaining liquidity.
 
 
 
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Our Competition

The home improvement retailing business includes many competitors.  We compete with other chains of home improvement warehouse stores and lumberyards in most of our trade areas.  We also compete with traditional hardware, plumbing, electrical and home supply retailers.  In addition, we compete, with respect to some of our products, with general merchandise retailers, mail order firms, warehouse clubs, and online retailers.  The principal competitive factors in our industry include location of stores, price and quality of merchandise, in-stock levels, merchandise assortment and presentation, and customer service.  See further discussion of competition in Item 1A of this Annual Report on Form 10-K, “Risk Factors.”

Products and Services

Our Products

Product Selection
To meet customers’ varying home improvement needs, we offer a complete line of products for home decorating, maintenance, repair, remodeling, and property maintenance.  We offer home improvement products in the following categories: appliances, paint, lumber, flooring, building materials, millwork, lawn & landscape products, hardware, fashion plumbing, tools, lighting, seasonal living, rough plumbing, nursery, outdoor power equipment, cabinets & countertops, rough electrical, home environment, home organization, and windows & walls.  A typical Lowe's store stocks approximately 40,000 items, with hundreds of thousands of items available through our Special Order Sales system and Lowes.com.  Our Special Order Sales product offerings provide our customers the opportunity to select a wider assortment of product options beyond the items we carry in our stores through electronic product catalogs and Lowes.com.  We continue to enhance integrated design tools and ordering systems storewide in order for customers to envision projects, as well as to efficiently receive price quotes and complete an order.  See Note 15 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K for historical revenues by product category for each of the last three fiscal years.

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

National Brand Name Merchandise
In many product categories, customers look for a brand they know and trust to instill confidence in their purchase.  Each Lowe’s store carries a wide selection of national brand name merchandise such as Whirlpool®, Stainmaster®, Valspar®, Pella® and many more.  Our merchandise selection provides the DIY, DIFM and Commercial Business Customer a one-stop shop for a wide variety of national brand name merchandise needed to complete home improvement, repair, maintenance or construction projects.

Proprietary Brands
We also sell many brands that are exclusive to Lowe’s to further differentiate our product offerings from our competitors’.  These unique brands cover several categories, including lighting, flooring and tools, and give our customers great quality and value. Examples of brand names exclusive to Lowe’s are Aquasource®, Garden Treasures®, Harbor Breeze®, Kobalt®, Portfolio®,  Reliabilt®, Top-Choice®, and Utilitech®.

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

Supply Chain
To efficiently move product from our vendors to our stores and maintain in-stock levels, we own and operate 14 highly-automated regional distribution centers (RDCs).  On average, each RDC serves 121 stores.  In addition, we utilize a third-party distribution facility to serve our Canadian stores.  We also operate 15 flatbed distribution centers (FDCs) to distribute merchandise that requires special handling due to size or type of packaging such as lumber, boards, panel products, irrigation pipe, vinyl sidings, ladders and building materials.  Additionally, we operate three facilities to support our import business, Special Order Sales and internet fulfillment. We also utilize three third-party transload facilities.  These facilities do not hold inventory, but are the first point of receipt for imported products.  The transload facilities sort and allocate products to RDCs based on individual store demand and forecasts.

On average in fiscal 2009, over 74% of the total dollar amount of stock merchandise we purchased was shipped through our distribution network, while the remaining portion was shipped directly to stores from our vendors.
 

 
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Our Service Offerings

Installed Sales
We offer installation services through independent contractors in many of our product categories, with flooring, millwork and cabinets & countertops generating the highest sales.  Our Installed Sales model, which separates selling and project administration tasks, allows our sales associates to maintain their focus on project selling, while project managers ensure that the details related to installing the products sold are efficiently executed.  Installed Sales, which includes both product and labor, accounted for approximately 6% of total sales in fiscal 2009.

Commercial Business Customers
We strive to be a valued business partner to Commercial Business Customers.  Because we understand the challenges they face in the current economic environment and the importance of timeliness to these customers, we continue to evaluate and tailor our support program to best meet their needs.  These programs focus on in-stock and special order merchandise, contractor packs, business credit, and other convenience services such as fast ordering and 7-day delivery.  We also offer a Quote Support Program which provides quotes to Commercial Business Customers for larger projects and helps to ensure our pricing on these projects is competitive.  In addition, we offer a district commercial account specialist program in many of our markets which expands our close-support program for Commercial Business Customers.  We also have a dedicated web site for these customers, LowesForPros.com, that makes it easier for them to use the programs we have designed specifically for them.

Credit Financing
We offer a proprietary credit card for retail customers.  In addition, we offer a Lowe’s Project Card in all stores.  The Lowe’s Project Card provides a major project, in-store financing solution to complement our Lowe’s Consumer Revolving Credit Card.

We also offer proprietary credit programs for Commercial Business Customers.  They include a Lowe’s Business Account, which is ideal for small- to medium-size businesses and offers minimum monthly payments, and Lowe’s Accounts Receivable, which is ideal for medium- to large-size businesses that pay in full each month.  We also offer the Lowe’s Business Rewards Card from American Express®, which is a business credit card with a rewards program that enables business owners to earn points on virtually all card purchases.

In addition, we accept Visa®, MasterCard®, Discover® and American Express® credit cards, as well as debit cards from all major networks.

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

Distribution Channels

Stores
Our 1,710 retail home improvement stores are open seven days per week, 363 days per year, and average approximately 113,000 square feet of retail selling space, which includes approximately 32,000 square feet of outdoor garden center selling space.  Our stores offer similar products and services, with certain minor variations based on local market factors.

Lowes.com
Lowes.com seeks to empower consumers by providing a 24/7 shopping experience and helping reduce the complexity of product decisions and home improvement projects by providing online product information, customer ratings and reviews, online buying guides and how-to videos and information.  These tools help consumers make smarter, more informed purchasing decisions and give consumers confidence as they undertake simple to more complex home improvement projects.  We also enable consumers to choose from a variety of multichannel fulfillment options, including buy online and pick-up in-store as well as direct shipment to customers’ homes.  As our business evolves, we continue to look for opportunities beyond fulfillment to leverage emerging technologies and online trends to build strong relationships with consumers that will make us the first choice for their home improvement needs.  Lowes.com sales accounted for less than 1% of total sales in fiscal 2009.
 

 
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New Store Expansion

We opened 62 new stores in fiscal 2009, including five Canadian stores.  Our 2009 store openings included three primary prototypes: 117,000-square-foot (117K) and 103,000-square-foot (103K) stores for large markets and a 94,000-square-foot (94K) store to serve smaller markets.  The following table illustrates our store expansion over the last three years:
 
   
2009
   
2008
   
2007
 
Number of stores, beginning of fiscal year
    1,649       1,534       1,385  
Stores opened
    62       115       153  
Stores relocated
    -       -       (4)  
Stores closed
    (1)       -       -  
Number of stores, end of fiscal year
    1,710       1,649       1,534  
                         
Consists of:
                       
Domestic
    1,694       1,638       1,528  
Canadian
    16       11       6  

We expect to open 40 to 45 new stores in fiscal 2010.  That estimate includes continued expansion of our store base in Canada, including our first stores in Western Canada, as well as our first stores in Monterrey, Mexico.  Our fiscal 2010 store openings will be comprised primarily of 117K, 103K and 94K stores.  As we continue our expansion and strive to maximize our return on investment, we consider market demographics and land availability, among other factors, to determine the appropriate prototype for a particular market.  The reduction in store openings in 2010 as compared to 2009 reflects the continued challenging current economic environment.

Employees
 
As of January 29, 2010, we employed approximately 166,000 full-time and 73,000 part-time employees, none of which in the U.S. or Canada are covered by collective bargaining agreements.  Management considers its relations with its employees to be good.

Seasonality and Working Capital

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

Intellectual Property

The name “Lowe’s” is a registered service mark of one of our wholly-owned subsidiaries. We consider this mark and the accompanying name recognition to be valuable to our business. This subsidiary has various additional registered trademarks, trade names and service marks, most of which are used in our proprietary brand program.  Examples of brand names exclusive to Lowe’s are Aquasource®, Garden Treasures®, Harbor Breeze®, Kobalt®, Portfolio®,  Reliabilt®, Top-Choice®, and Utilitech®.

Environmental Leadership

We continue to build on a history of environmental leadership by helping consumers reduce their energy and water use and their environmental footprint while saving money through a growing number of product and service solutions.  We offer a wide selection of environmentally responsible and energy-efficient products for the home, from ENERGY STAR® appliances to low VOC paint.  

 
 
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Some highlights of our environmental leadership include:
 
§
  
The U.S. Environmental Protection Agency awarded us the 2010 ENERGY STAR® Sustained Excellence Award in Retail, which recognizes our long-standing leadership as a retailer of energy-efficient products, as well as eight consecutive ENERGY STAR® awards (2003-2010), including four ENERGY STAR® Partner of the Year awards for educating consumers about the benefits of energy efficiency.
 
§
We participate in the Carbon Disclosure Project, an independent not-for-profit organization holding the largest database of primary corporate climate change information in the world. 
 
§
We provide in-store recycling for plastic bags, CFLs and rechargeable batteries.
 
§   
We were recognized as a Top 10 retailer participating in the U.S. Environmental Protection Agency’s Green Power Partnership program. 
 
In addition to operating our stores as efficiently as possible by reducing our energy and water usage, we are striving to get products to our stores in an environmentally responsible manner.  Our conservation strategies and continued contributions to the transportation industry have been honored by multiple SmartWay Environmental Excellence Awards, an innovative program   launched by the U.S. Environmental Protection Agency in 2004 that represents environmentally cleaner, more fuel efficient transportation options. To earn those awards, we implemented initiatives that resulted in reduced carbon dioxide emissions and less overall highway congestion. These included increasing shipping by rail, increasing efficiency of truckload shipments, allowing more products to be shipped on fewer trailers, and continuing to use a higher percentage of SmartWay carriers.

Compliance with Environmental Matters

Our operations are subject to numerous federal, state and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment.  They have in the past and may in the future increase our costs of doing business in a variety of ways, including indirectly through increased energy and product costs as producers of energy, cement, iron, steel, pulp, paper, petroleum and other major emitters of greenhouse gases are subjected to increased or new regulation or legislation that results in greater regulation of greenhouse gas emissions.   We do not anticipate any material capital expenditures during fiscal 2010 for environmental control facilities or other costs of compliance with such laws or regulations.
 
Reaching Out

We believe community involvement extends beyond the boundaries of our stores.  In 2009, Lowe's and Lowe's Charitable and Educational Foundation (LCEF) contributed more than $30 million to schools and community organizations in the United States and Canada.  LCEF was created in 1957 to assist communities through financial contributions while also encouraging employees to become involved through volunteerism.  In 2009, LCEF supported more than 2,300 community and education projects.  The Foundation funds our signature grant program, Lowe’s Toolbox for Education®, and partnerships with organizations including   SkillsUSA®, Rebuilding Together®, the Home Safety Council and The Nature Conservancy.  Since 2003, Lowe’s has worked with Habitat for Humanity® International to combat substandard housing.  Our commitment through 2013 will bring Lowe's Habitat contributions to nearly $40 million since the partnership began. We also partner with customers to support the American Red Cross and the Muscular Dystrophy Association (MDA), contributing more than $9 million to MDA since 2001 and nearly $21 million to the American Red Cross since 1999.  Lowe’s also encourages employee volunteerism through the Lowe’s Heroes program, a company-wide initiative.  For more information on our community involvement, please see the Lowe’s Social Responsibility Report at www.Lowes.com/socialresponsibility .

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

 
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Item 1A – Risk Factors

We are exposed to a variety of risks and uncertainties. Most are general risks and uncertainties applicable to all retailers, but some are more particular to retailers serving the home improvement industry.   Our operations may also be affected by factors that are either not currently known to us or which we currently consider immaterial to our business.  We describe below some of the specific known factors that could negatively affect our business, financial condition and results of operations.  All forward-looking statements made by us in this Annual Report to the Securities and Exchange Commission on Form 10-K, in our Annual Report to Shareholders and in our subsequently filed quarterly and current reports to the Securities and Exchange Commission, as well as in our press releases and other public communications, are qualified by the risks described below.

Our sales are dependent upon the health and stability of the general economy.
General economic factors and other conditions, both domestically and internationally, may adversely affect the U.S. economy, the global economy and our financial performance.  These include, but are not limited to, periods of flat economic growth or recession, volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of credit to Lowe’s and its customers, slower rates of growth in real disposable personal income, higher rates of unemployment, higher consumer debt levels, increasing fuel and energy costs, inflation or deflation of commodity prices, natural disasters, acts of terrorism and developments in the war against terrorism in Asia, the Middle East and other parts of the world.

The global recession that began in the U.S. in December 2007 and the slow recovery that (we believe) is currently under way, together with the financial/credit crisis that erupted during the fall of 2008 and led to the collapse, government bailout or acquisition of numerous weakened financial institutions, have had and will continue to have significant adverse effects on our results of operations.  Continued high rates of unemployment, the psychological effect of falling home prices, volatility in consumer confidence indices, consumer deleveraging and reduced access to credit have combined to lead to sharply reduced consumer spending, particularly by our customers on many of the discretionary, big-ticket items we sell that tend to be larger home improvement project driven.  For these reasons consumer confidence and willingness to spend on discretionary items remain relatively low.  And although we expect them to be stronger in 2010 than 2009, our sales and results of operations will continue to be adversely affected throughout the 2010 fiscal year.

Adverse changes in economic factors specific to the home improvement industry may negatively impact the rate of growth of our total sales and comparable store sales.
Sales of many of our product categories and services are driven by housing turnover and activity level of home improvement projects.  The expiration of government stimulus programs specific to the housing sector during the second half of fiscal year 2010 may adversely affect the rate of housing turnover. Steep declines over the last three years in home prices, the increasing number of households with negative equity, increasing mortgage delinquency and foreclosure rates, reduction in the availability of mortgage financing, rising interest rates on variable rate mortgages, and significantly lower housing turnover, have limited and may continue to limit consumers’ discretionary spending, particularly on discretionary items, and affect their confidence level to spend on larger home improvement projects.   The impact of these economic factors specific to the home improvement industry is exacerbated by what is expected to be a gradual and prolonged period of economic recovery with slow employment growth.

Unseasonable weather conditions and adverse weather events can negatively affect our total sales and comparable store sales.
If weather conditions are uncharacteristic of the time of year during any season, they can hurt our sales by making it difficult to sell seasonal merchandise.   Although the impact of unseasonable weather conditions is mitigated somewhat by the broad geographic dispersion of our stores, they continue to be a significant risk to the overall performance of our business, particularly when they occur across a broad region of the U.S.  Adverse weather events, such as a prolonged and widespread drought, can hurt our sales of particular products as well.

Our store expansion and relocation strategy depends upon our ability to successfully open and operate new stores each year.
Our growth in total sales depends not only on a recovery from the current recessionary period but also to a substantial degree on successfully and cost-effectively implementing our ongoing expansion program.  We have scaled back our expansion plans significantly in the last two years and plan to scale them back further during fiscal year 2010 in response to the weak macroeconomic environment.   As we expand further, we must adapt our merchandising, marketing and distribution initiatives to new markets both domestically and internationally, as we continue to expand into Canada and Mexico.   International expansion presents unique challenges that may increase the anticipated costs and slow the anticipated rate of such expansion.

We also plan to increase the number of our stores in markets in which we currently operate.  Our ability to open additional stores depends, in large measure, upon our ability to locate and acquire new store sites on acceptable terms.   Local land use and other regulations restricting the construction of buildings in the formats with which we operate may affect our ability to open new stores in some markets.  As we develop more new stores in metropolitan markets, we may incur increased costs to remediate environmental pollution on some of the sites we are redeveloping that was caused by previous owners of those sites.  Our ability to continue to expand our operations depends also on our ability to attract and retain qualified employees.  If we are unable to open new stores at the
 

 
9

 
 

rate we currently plan and staff them with qualified employees, the growth in our sales and our competitive position could be adversely affected.

If we fail to hire, train and retain qualified managers, sales associates and other employees we could lose sales to our competitors.
Customers’ perceptions of the quality of service provided by employees can determine any retailer’s success or failure.  If we fail to attract, train and retain qualified managers and sales associates our financial performance could be adversely impacted.  Consumers shopping for goods and services for home improvement projects expect to have sales associates serving them who are knowledgeable about product categories located throughout our stores. Excessive turnover, which has historically been high among employees in entry-level or part-time positions, increases the risk that sales associates will not have the training and experience needed to provide competitive, high quality customer service.

Our success in serving the needs of Commercial Business Customers is dependent upon our ability to attract and retain qualified commercial sales specialists.
Commercial Business Customers in the home improvement industry require that we have well-trained commercial sales specialists at our project desks.  By doing so, we can better serve the needs of this customer on a consistent basis.  Our commercial sales specialists have a great depth of knowledge about the products needed by Commercial Business Customers.  If we fail to staff our project desks with experienced and knowledgeable employees, we run the risk that we will lose Commercial Business Customers.

We have many competitors, who, if we fail to execute our merchandising, marketing and distribution strategies effectively, could take sales and market share from us.
We operate in a highly competitive market for home improvement products and services and have numerous large and small, direct and indirect competitors.  The competitive environment in which we operate is particularly challenging during recessionary and economic recovery periods with heavy promotions, particularly of discretionary items, and competitor closings. The principal competitive factors in our industry include location of stores, price and quality of merchandise, in-stock consistency, merchandise assortment and presentation, and customer service.  Our failure to respond effectively to competitive pressures and changes in the retail markets could affect our financial performance.  Moreover, changes in the promotional pricing and other practices of our competitors, including the effects of competitor liquidation activities, may impact our expected results.

An unusual number of product liability or breach of warranty claims for defective products could expose us to expensive claims and damage our standing with customers.
We are exposed to product liability and product warranty claims relating to the products we sell that could adversely affect our financial condition, results of operations and cash flows.  Because we do not have direct control over the quality of products manufactured or supplied to us by our vendors and because we self-insure for such product liability and warranty claims, we are exposed to risks relating to the quality of such products.  Product liability claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature, as well as mandatory or voluntary recalls of defective products we have sold, could also have a negative impact on customer confidence in the products we stock and in our reputation.

Our financial performance could suffer if we fail to properly maintain our critical information systems or if those systems are seriously disrupted.
An important part of our efforts to achieve efficiencies, cost reductions, and sales and cash flow growth is the identification and implementation of improvements to our management information systems to improve operations such as inventory replenishment systems, merchandise ordering, transportation, and receipt processing.  Our financial performance could be adversely affected if our management information systems are seriously disrupted or we are unable to improve, upgrade, maintain, and expand our systems.

Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with evolving regulations relating to our obligation to protect such data.
While we have invested heavily in the protection of our information technology and maintain what we believe are adequate security controls over individually identifiable customer, employee and vendor data provided to us, a breakdown or a breach in our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could nonetheless occur and have a material adverse effect on our reputation, operating results and financial condition.  Such a breakdown or breach could also materially increase the costs we incur to protect against such risks.  Also, the regulatory environment relating to our obligation to protect such sensitive data is becoming stricter.  A material failure on our part to comply with these evolving regulations could subject us to fines or other regulatory sanctions and potentially to lawsuits.

If the domestic or international supply chain for our products is disrupted, our sales and gross margin would be adversely impacted.
We source the approximately 40,000 products we stock and sell from approximately 7,000 domestic and international vendors.  We source many of those products directly from foreign manufacturers.  Political or financial instability among suppliers, trade restrictions, tariffs, currency exchange rates and transport capacity and costs are beyond our control and could negatively impact our business if they seriously disrupted the movement of products through our supply chain.   The global recession from which we are
 

 
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beginning to recover and the credit crisis that began in late 2008 and continues to some extent have adversely affected the operations and financial stability of some of our vendors by reducing their sales and restricting their access to capital.  We may have to replace some of our smaller vendors, and some of our vendors may not be able to fulfill their financial obligations to us or to do so in a timely manner.

Our inability to effectively manage our relationships with selected suppliers of brand name products could negatively impact our ability to differentiate ourselves from competitors.
Part of our expansion strategy includes continued differentiation from competitors.  To better distinguish our product offering, we form strategic relationships with selected suppliers to market and develop products under a variety of recognized and respected brand names.  The inability to effectively and efficiently manage the relationships with these suppliers could negatively impact our business plan and financial results.

Changes in existing or new laws and regulations could adversely affect our business.
 Laws and regulations at both the state and federal levels change frequently and can impose significant costs and other burdens of compliance on our business and our merchandise vendors.  Any changes in regulations, the imposition of additional regulations, or the enactment of any new legislation that affects employment/labor, trade, product safety, transportation/logistics, energy costs, health care, tax or environmental issues, could have an adverse impact, directly or indirectly, on our financial condition and results of operations.

Item 1B – Unresolved Staff Comments

None.

Item 2 - Properties
 
At January 29, 2010 we operated 1,710 stores in the U.S. and Canada with a total of 193 million square feet of selling space. Of the total stores operating at January 29, 2010, approximately 88% are owned, which includes stores on leased land, with the remainder being leased from unaffiliated third-parties.  Approximately 49% of our store leases are capital leases. We also own and operate 14 RDCs and 13 FDCs for lumber and building commodities.  We lease and operate two additional FDCs.   We also operate three facilities to support our import business, Special Order Sales and internet fulfillment.  We own two and lease one of these facilities.  In addition, we utilize three third-party transload facilities, which do not hold inventory but are the first point of receipt for imported products.  We own one data center and lease one data center that serve as hubs for our computer processing, critical data storage and information technology systems.  We own one building and lease additional space for our countertop fabrication operation located in Plain City, Ohio. We own our executive offices, which are located in Mooresville, North Carolina.  We also own and maintain offices in Wilkesboro, North Carolina, and lease and maintain offices in Toronto, Canada, and Monterrey, Mexico.

Item 3 - Legal Proceedings
 
We are a defendant in legal proceedings considered to be in the normal course of business, none of which, individually or collectively, is considered material.

Item 4 – Reserved  

 
11

 


EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of names and ages of all of the executive officers of the registrant indicating all positions and offices with the registrant held by each such person and each person's principal occupations or employment during the past five years.

 
Name
 
Age
 
Title
Robert A. Niblock
47
Chairman of the Board and Chief Executive Officer since 2005; President, 2003 - 2006.
     
Maureen K. Ausura
54
Senior Vice President, Human Resources since 2005.
     
Gregory M. Bridgeford
55
Executive Vice President, Business Development since 2004.
     
Michael K. Brown
46
Executive Vice President, Store Operations since 2006; Senior Vice President, Store Operations, 2001 - 2006.
     
Charles W. (Nick) Canter, Jr.
59
Executive Vice President, Merchandising since 2006; Executive Vice President, Store Operations, 2005 - 2006; Senior Vice President, Store Operations,
1999 - 2005.
     
Marshall A. Croom
49
Senior Vice President and Chief Risk Officer   since 2009; Senior Vice President, Merchandising and Store Support 2006 - 2009; Senior Vice President, Finance 2003 - 2006.
     
Matthew V. Hollifield
43
Senior Vice President and Chief Accounting Officer since 2005; Vice President, Corporate Accounts Payable 2002 - 2005.
     
Robert F. Hull, Jr.
45
Executive Vice President and Chief Financial Officer since 2004.
     
Gaither M. Keener, Jr .
60
Senior Vice President, General Counsel, Secretary and Chief Compliance Officer since 2006; Vice President, Deputy General Counsel, 2005 - 2006.
     
Joseph M. Mabry, Jr.
47
Executive Vice President, Logistics and Distribution since 2004.
     
N. Brian Peace
44
Senior Vice President, Corporate Affairs since 2006; Vice President, Corporate Communications, 1999 - 2006.
     
Larry D. Stone
58
President and Chief Operating Officer since 2006; Senior Executive Vice President Merchandising/Marketing, 2005 - 2006; Senior Executive Vice President Store Operations, 2003 - 2005.
     
Steven M. Stone
 
Todd I. Woods
48
 
42
Senior Vice President and Chief Information Officer since 2003.
 
Senior Vice President, Deputy General Counsel and Assistant Secretary since 2009; Vice President, Associate General Counsel and Assistant Secretary, 2006 - 2009; Assistant General Counsel, 2005 - 2006.
 

 
12

 
 

Part II

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Lowe's common stock is traded on the New York Stock Exchange (NYSE). The ticker symbol for Lowe's is “LOW”.  As of March 26, 2010, there were 31,041 holders of record of Lowe's common stock. The table, "Quarterly Stock Price Range and Cash Dividends Declared", on page 48 of the 2009 Lowe’s Annual Report to Shareholders for the fiscal year ended January 29, 2010 sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by the NYSE Composite Tape and the dividends per share declared on the common stock during such periods.

The following table sets forth information with respect to purchases of the Company’s common stock made during the fourth quarter of 2009:
 
Issuer Purchases of Equity Securities                        
(In millions, except average price paid per share)
 
Total Number of Shares Purchased ( 1)
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ( 2)
 
                         
October 31, 2009 – November 27,  2009
    5.8     $ 21.64       5.8     $ 2,089  
November 28, 2009 – January 1, 2010
    16.2       23.24       16.1       1,714  
January 2, 2010 – January 29, 2010
    -       -       -       5,000  
                                 
As of January 29, 2010
    22.0     $ 22.82       21.9     $ 5,000  
                                 

 
(1)  During the fourth quarter of fiscal 2009, the Company repurchased an aggregate of 21,915,676 shares of its common stock pursuant to the share repurchase program.  The total number of shares purchased also includes a nominal amount of shares repurchased from employees to satisfy either the exercise price of certain stock options or their statutory withholding tax liability upon the vesting of restricted shares.

 
(2)  Authorization available for share repurchases under the previous program expired as of January 29, 2010.  An additional authorization for up to $5 billion of share repurchases with no expiration was approved on January 29, 2010 by the Company’s Board of Directors. Although this new repurchase authorization has no expiration, the Company expects to implement the program over the next three years through purchases made from time to time either in the open market or through private transactions, in accordance with SEC regulations.

Item 6 - Selected Financial Data

See page 47 of the Lowe’s 2009 Annual Report to Shareholders.

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations

See "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 26 and "Disclosure Regarding Forward-Looking Statements" on page 27 of Lowe’s 2009 Annual Report to Shareholders.

Item 7A - Quantitative and Qualitative Disclosures About Market Risk

See "Quantitative and Qualitative Disclosures About Market Risk" on page 26 of Lowe’s 2009 Annual Report to Shareholders.

Item 8 - Financial Statements and Supplementary Data

See "Report of Independent Registered Public Accounting Firm" of Deloitte & Touche LLP on page 28, the financial statements and notes thereto on pages 30 through 46, and the "Selected Quarterly Data" on page 47 of Lowe’s 2009 Annual Report to Shareholders.


 
13

 


Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A - Controls and Procedures

The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, (as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act)). Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
In addition, no change in the Company’s internal control over financial reporting occurred during the fiscal fourth quarter ended January 29, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Management’s report on internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) and the report of Deloitte & Touche LLP, the Company’s independent registered public accounting firm, are included in Lowe’s 2009 Annual Report to Shareholders on pages 27 and 29 under the headings, “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” respectively, and are incorporated herein by reference.

Item 9B - Other Information

None.
 

 
14

 
 

Part III

Item 10 - Directors, Executive Officers and Corporate Governance

Information required by this item is furnished by incorporation by reference to all information under the captions entitled, “Election of Directors,” “Information Concerning the Nominees,” “Information Concerning Continuing Directors,” “Information about the Board of Directors and Committees of the Board,” and “Section 16(a) Beneficial Ownership Reporting Compliance” included in the definitive Proxy Statement which will be filed pursuant to regulation 14A, with the SEC within 120 days after the fiscal year ended January 29, 2010 (the Proxy Statement).  The information required by this item with respect to our executive officers appears in Part I of this Annual Report on Form 10-K under the caption, “Executive Officers of the Registrant.”

All employees of the Company, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer are required to abide by the Lowe's Companies, Inc. and Subsidiaries Code of Business Conduct and Ethics (the Code). The Code is designed to ensure that the Company's business is conducted in a legal and ethical manner. The Code covers all areas of professional conduct including compliance with laws and regulations, conflicts of interest, fair dealing among customers and suppliers, corporate opportunity, confidential information, insider trading, employee relations and accounting complaints. A full text of the Code can be found at www.Lowes.com, under the “About Lowe’s,” “Investors” and “Code of Ethics” captions. You can also obtain a copy of the complete Code by contacting Shareholder Services at 1-888-345-6937.

We will disclose information pertaining to amendments or waivers to provisions of our Code that apply to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions and that relate to the elements of our Code enumerated in the SEC rules and regulations by posting this information on our website at www.Lowes.com. The information on our website is not a part of this Annual Report and is not incorporated by reference in this report or any of our other filings with the SEC.

Item 11 - Executive Compensation

Information required by this item is furnished by incorporation by reference to all information under the captions entitled, “Executive Officer Compensation” and “Information about the Board of Directors and Committees of the Board – Compensation of Directors” included in the Proxy Statement.

Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is furnished by incorporation by reference to all information under the captions entitled, “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” included in the Proxy Statement.

Item 13 - Certain Relationships and Related Transactions, and Director Independence

Information required by this item is furnished by incorporation by reference to all information under the captions entitled, “Related-Party Transactions” and “Information about the Board of Directors and Committees of the Board - Director Independence” included in the Proxy Statement.

Item 14 - Principal Accounting Fees and Services

Information required by this item is furnished by incorporation by reference to all information under the caption entitled, “Audit Matters - Fees Paid to the Independent Registered Public Accounting Firm” included in the Proxy Statement.

 
 
15

 
 
 
Part IV

Item 15 - Exhibits, Financial Statement Schedules

a) 1. Financial Statements
See the following items and page numbers appearing in Lowe’s 2009 Annual Report to Shareholders:
 
     
Page(s)
 
Reports of Independent Registered Public Accounting Firm
 
28-29
       
 
Consolidated Statements of Earnings for each of the three fiscal years in the period ended January 29, 2010
 
30
       
 
Consolidated Balance Sheets at January 29, 2010 and January 30, 2009
 
31
       
 
Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended January 29, 2010
 
32
       
 
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 29, 2010
 
33
       
 
Notes to Consolidated Financial Statements for each of the three fiscal years in the period ended January 29, 2010
 
34-46


  2. Financial Statement Schedule


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina

We have audited the accompanying consolidated financial statements of Lowe's Companies, Inc. and subsidiaries (the "Company")  as of January 29, 2010 and January 30, 2009, and for each of the three fiscal years in the period ended January 29, 2010, and the Company's internal control over financial reporting as of January 29, 2010, and have issued our reports thereon dated March 30, 2010; such consolidated financial statements and reports are included in the Company's 2009 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.


/s/ Deloitte & Touche LLP
 
Charlotte, North Carolina
March 30, 2010
 
 
 
16

 
 

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                               
                               
(In Millions)
 
Balance at beginning of period
   
Charges to costs
 and expenses
     
Deductions
     
Balance at
end of period
 
                               
January 29, 2010:
                           
Reserve for loss on obsolete inventory
  $ 58     $ -       $ (9 )
(a)
  $ 49  
Reserve for inventory shrinkage
    129       291         (282 )
(b)
    138  
Reserve for sales returns
    49       2  
(c)
    -         51  
Deferred tax valuation allowance
    42       23  
(d)
    -         65  
                                       
January 30, 2009:
                                   
Reserve for loss on obsolete inventory
  $ 67     $ -       $ (9 )
(a)
  $ 58  
Reserve for inventory shrinkage
    137       374         (382 )
(b)
    129  
Reserve for sales returns
    51       -         (2 )
(c)
    49  
Deferred tax valuation allowance
    22       20  
(d)
    -         42  
                                       
February 1, 2008:
                                   
Reserve for loss on obsolete inventory
  $ 66     $ 1  
(a)
  $ -       $ 67  
Reserve for inventory shrinkage
    129       428         (420 )
(b)
    137  
Reserve for sales returns
    55       -         (4 )
(c)
    51  
Deferred tax valuation allowance
    4       18  
(d)
    -         22  
                                       
(a):    Represents increase/(decrease) in the required reserve based on the Company’s evaluation of obsolete inventory.
 
( b):    Represents the actual inventory shrinkage experienced at the time of physical inventories.
 
(c):    Represents increase/(decrease) in the required reserve based on the Company’s evaluation of anticipated merchandise returns.
(d):   Represents an increase in the required reserve based on the Company’s evaluation of deferred tax assets.
 
 
 
 
17

 


  3.
  Exhibits
   
(3.1)
Restated and Amended Charter (filed as Exhibit 3.1 to the Company's Form 10-Q dated September 3, 2008 and incorporated by reference herein).
   
(3.2)
Bylaws, as amended and restated (filed as Exhibit 3.1 to the Company's Form 8-K dated August 28, 2008 and incorporated by reference herein).
   
(4.1)
Indenture dated April 15, 1992 between the Company and The Bank of New York, as successor trustee (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 33-47269) and incorporated by reference herein).
   
(4.2)
Amended and Restated Indenture, dated as of December 1, 1995, between the Company and The Bank of New York, as successor trustee (filed as Exhibit 4.1 on Form 8-K dated December 15, 1995, and incorporated by reference herein).
   
(4.3)
First Supplemental Indenture, dated as of February 23, 1999, to the Amended and Restated Indenture dated as of December 1, 1995, between the Company and The Bank of New York, as successor trustee (filed as Exhibit 10.13 to the Company's Annual  Report on Form 10-K dated April 19, 1999, and incorporated by reference herein).
   
(4.4)
Second Supplemental Indenture, dated as of October 19, 2001, to the Amended and Restated Indenture dated as of  December 1, 1995, between the Company and The Bank of New York, as successor trustee (filed as Exhibit 4.1 on Form  8-K dated October 25, 2001, and incorporated by reference herein).
   
(4.5)
Third Supplemental Indenture, dated as of October 6, 2005, to the Amended and Restated Indenture dated as of December 1, 1995, between the Company and The Bank of New York, as trustee, (filed as Exhibit 4.5 to the Company’s Annual Report on Form 10-K dated April 3, 2007, and incorporated by reference herein) including as an exhibit thereto a form of the Company’s 5.0% Notes maturing in October 2015 and the Company’s 5.5% Notes maturing in October 2035.
   
(4.6)
Fourth Supplemental Indenture, dated as of October 10, 2006, between Lowe’s Companies, Inc. and The Bank of New York, as trustee (filed as Exhibit 4.5 to the Company’s Registration Statement on Form S-3 (No. 333-137750) and incorporated by reference herein), including as an exhibit thereto a form of the Company’s 5.4% Senior Notes maturing in October 2016 and the Company’s 5.8% Senior Notes maturing in October 2036.
   
(4.7)
Fifth Supplemental Indenture, dated as of September 11, 2007, between Lowe’s Companies, Inc. and The Bank of New York, as trustee (filed as Exhibit 4.1 to the Company’s Form 8-K dated September 6, 2007 and incorporated by reference herein), including as an exhibit thereto a form of the Company’s 5.6% Senior Notes maturing in September 2012, the Company’s 6.1% Senior Notes maturing in September 2017, and the Company’s 6.65% Senior Notes maturing in September 2037.
   
(4.8)
Indenture between the Company and The Bank of New York, dated as of February 16, 2001 (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 333-60434), and incorporated by reference herein).
   
(4.9)
Form of the Company's 6 7/8 % Debenture due February 20, 2028 (filed as Exhibit 4.2 on Form 8-K dated February 20, 1998, and incorporated by reference herein).
   
(4.10)
Form of the Company's 6 1/2 % Debenture due March 15, 2029 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein).
   
 

 
18

 
 

(4.11)
Form of the Company's 8 1/4 % Notes due June 1, 2010 (filed as Exhibit 4.2 on Form 8-K dated June 8, 2000, and incorporated by reference herein).
   
(4.12)
Amended and Restated Credit Agreement dated as of June 15, 2007 (filed as Exhbit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended August 3, 2007 and incorporated by reference herein).
 
*(10.1)
Lowe's Companies, Inc. Directors' Deferred Compensation Plan, effective July 1, 1994 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2008 and incorporated by reference herein).
   
*(10.2)
Lowe's Companies, Inc. 1997 Incentive Plan (filed on the Company's Form S-8 dated August 29, 1997 (No. 333-34631) and incorporated by reference herein).
   
*(10.3)
Amendments to the Lowe's Companies, Inc. 1997 Incentive Plan dated January 25, 1998 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein).
   
*(10.4)
Amendments to the Lowe's Companies, Inc. 1997 Incentive Plan dated September 17, 1998 (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein).
   
*(10.5)
Lowe's Companies, Inc. Employee Stock Purchase Plan - Stock Options for Everyone, as amended and restated (filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended January 30, 2009, and incorporated by reference herein).
   
*(10.6)
Lowe's Companies, Inc. 2001 Incentive Plan (filed on the Company's Form S-8 dated November 15, 2001 (No. 333-73408) and incorporated by reference herein).
   
*(10.7)
Lowe's Companies, Inc. Benefit Restoration Plan as amended and restated as of January 1, 2008 (filed as Exhibit 10.2 to the Company’s Form 10-Q dated December 12, 2007, and incorporated by reference herein).
   
*(10.8)
Form of the Company's Management Continuity Agreement for Tier I Senior Officers (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 2008, and incorporated by reference herein).  
   
*(10.9)
Form of the Company's Management Continuity Agreement for Tier II Senior Officers (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended August 1, 2008, and incorporated by reference herein). 
   
*(10.10)
Lowe’s Companies, Inc. Cash Deferral Plan (filed as Exhibit 10.1 to the Company’s Form 10-Q dated June 4, 2004 and incorporated by reference herein).
   
*(10.11)
Amendment  No. 1 to the Lowe’s Companies, Inc. Cash Deferral Plan (filed as Exhibit 10.1 to the Company’s Form 10-Q dated December 12, 2007 and incorporated by reference herein).
   
*(10.12)
Lowe’s Companies, Inc. Amended and Restated Directors’ Stock Option and Deferred Stock Unit Plan (filed as Exhibit 10.1 to the Company’s Form 8-K dated May 27, 2005 and incorporated by reference herein).
   
*(10.13)
Form of Lowe’s Companies, Inc. Deferred Stock Unit Agreement for Directors (filed as Exhibit 10.2 to the Company’s Form 8-K dated May 27, 2005 and incorporated by reference herein).
   
*(10.14)
Form of Lowe’s Companies, Inc. Restricted Stock Award Agreement (filed as Exhibit 10.1 to the Company’s Form 10-Q dated September 1, 2005 and incorporated by reference herein).
 
 
 
19

 

 
   
*(10.15)
Lowe's Companies, Inc. 2006 Annual Incentive Plan (filed as Exhibit 10.1 to the Company’s Form 10-Q dated September 7, 2006 and incorporated by reference herein).
   
*(10.16)
Lowe's Companies, Inc. 2006 Long Term Incentive Plan (filed as Exhibit 10.2 to the Company’s Form 10-Q dated September 7, 2006 and incorporated by reference herein).
   
*(10.17)
Amendment No. 2 to the Lowe’s Companies, Inc. Deferred Compensation Program (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended January 30, 2009, and incorporated by reference herein).
   
*(10.18)
Amendment No. 1 to the Lowe’s Companies, Inc. 2006 Long Term Incentive Plan (filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended January 30, 2009, and incorporated by reference herein).
   
*(10.19)
Lowe’s Companies, Inc. 401(k) Plan (filed as Exhibit 4 to Post Effective Amendment No. 1 to Registration Statement on Form S-8, No. 3329772, filed September 2, 2009).
   
*(10.20)
Amendment No. 5 to the Lowe’s Companies, Inc. 401(k) Plan (filed herewith).
   
*(10.21)
Amendment No. 1 to the Lowe’s Companies, Inc. Directors’ Deferred Compensation Program (filed herewith).
   
(12.1)
Statement Re Computation of Ratio of Earnings to Fixed Charges
   
(13)
Portions of the 2009 Lowe’s Annual Report to Shareholders for the fiscal year ended January  29, 2010
   
(21)
List of Subsidiaries
   
(23)
Consent of Deloitte & Touche LLP
   
(31.1)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
(31.2)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
(32.1)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
(32.2)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS
XBRL Instance Document
   
101.SCH
XBRL Taxonomy Extension Schema Document
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
   
 
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.
 

 
20

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
LOWE’S COMPANIES, INC.
   
(Registrant)
     
March 30, 2010
 
By: /s/ Robert A. Niblock
Date
 
Robert A. Niblock
   
Chairman of the Board and Chief Executive Officer
     
March 30, 2010
 
By: /s/ Robert F. Hull, Jr.
Date
 
Robert F. Hull, Jr.
   
Executive Vice President and Chief Financial Officer
     
March 30, 2010
 
By: /s/ Matthew V. Hollifield
Date
 
Matthew V. Hollifield
   
Senior Vice President and Chief Accounting Officer
 
 
 
21

 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each of the directors of the Registrant whose signature appears below hereby appoints Robert F. Hull, Jr., Matthew V. Hollifield and Gaither M. Keener, Jr., and each of them severally, as his or her attorney-in-fact to sign in his or her name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as directors and/or officers to enable the Registrant to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission.

         
/s/ Robert A. Niblock
 
Chairman of the Board of Directors, Chief Executive Officer and Director
 
March 30, 2010
Robert A. Niblock
     
Date
         
/s/ David W. Bernauer
 
Director
 
March 30, 2010
David W. Bernauer
     
Date
         
/s/ Leonard L. Berry
 
Director
 
March 30, 2010
Leonard L. Berry
     
Date
         
/s/ Peter C. Browning
 
Director
 
March 30, 2010
Peter C. Browning
     
Date
         
/s/ Dawn E. Hudson
 
Director
 
March 30, 2010
Dawn E. Hudson
     
Date
         
/s/ Robert A. Ingram
 
Director
 
March 30, 2010
Robert A. Ingram
     
Date
         
/s/ Robert L. Johnson
 
Director
 
March 30, 2010
Robert L. Johnson
     
Date
         
/s/ Marshall O. Larsen
 
Director
 
March 30, 2010
Marshall O. Larsen
     
Date
         
/s/ Richard K. Lochridge
 
Director
 
March 30, 2010
Richard K. Lochridge
     
Date
         
/s/ Stephen F. Page
 
Director
 
March 30, 2010
Stephen F. Page
     
Date
         
/s/ O. Temple Sloan, Jr.
 
Director
 
March 30, 2010
O. Temple Sloan, Jr.
     
Date

 
22

 

Exhibit 10.20

AMENDMENT NUMBER FIVE TO THE
LOWE’S 401(k) PLAN

This Amendment Number Five to the Lowe’s 401(k) Plan, as amended and restated effective February 3, 2007 (the “ Plan ”),   is adopted by Lowe’s Companies, Inc. (the “ Company ”).
 
W I T N E S S E T H:
 
WHEREAS, the Company currently maintains the Plan; and
 
WHEREAS, under Section 15 of the Plan, the Company may amend the Plan in whole or in part at any time; and
 
WHEREAS , the Company desires to amend the Plan to reflect recent regulatory and legislative changes required by the Pension Protection Act of 2006, and the Heroes Earnings Assistance and Relief Tax Act of 2008.
 
NOW, THEREFORE , the Company hereby amends the Plan effective as of January 1, 2008, or as otherwise specified herein, as follows:
 
1.           The third sentence of Section 9(g) shall be amended to read as follows:
 
“An “eligible retirement plan” is one of the following plans that accepts “eligible rollover distributions” and agrees to separately account for amounts transferred into such plan from this Plan”: (1) an individual retirement account described in Section 408(a) of the Code, (2) an individual retirement annuity described in Section 408(b) of the Code, (3) a qualified trust described in Section 401(a) of the Code, (4) a qualified annuity plan described in Section 403(a) of the Code, (5) an annuity contract described in Section 403(b) of the Code, (6) an eligible plan under Section 457(b)   of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, or (7) effective for distributions on and after December 31, 2007, a Roth IRA described in Code Section 408A(b), the terms of which permit the acceptance of a direct rollover from a qualified plan.”
 
2.           The following shall be added to the end of Section 9(g) effective as of January 1, 2007:
“For distributions after December 31, 2006, a non-spouse beneficiary who is a “designated beneficiary” under Code Section 401(a)(9)(E) and the regulations thereunder may elect a direct rollover, of all or any portion of an eligible rollover distribution within the meaning of Code Section 402(c)(4) to such non-spouse beneficiary, to an individual retirement account established for this purpose.  Any such distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code Section 401(a)(31), including Code Section 401(a)(31)(B), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c).  A non-spouse beneficiary who receives a distribution from the Plan is not eligible for a 60-day rollover. The portion of a Participant’s Capital Accumulation distribution consisting of after-tax contributions which are not includible in income shall be eligible for a direct rollover in accordance with this Section; provided that, prior to January 1, 2010, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code.  Effective on and after December 31, 2009, the portion of a Participant’s Capital Accumulation consisting of after-tax contributions which are not includible in income shall also be eligible for a direct rollover to a defined benefit plan described in Section 401(a) or 403(a) of the Code or to an annuity contract described in Code Section 403(b).  Notwithstanding the foregoing, a direct rollover of a Participant’s Capital Accumulation consisting of after-tax contributions which are not includible in income may be made only to an account or plan that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible in gross income.”
 
3.           The following new Section 10(f) shall be added to the Plan effective as of September 1, 2008.
 
“(f)           Distributions to Qualified Reservists – Effective on and after September 1, 2008, pursuant to Code Section 401(k)(2)(B)(i)(V), an individual who is a member of a reserve component who is called to active duty either for a period in excess of 179 days or for an indefinite period of time may elect to receive a “qualified reservist distribution” as defined in Code Section 72(t)(2)(G)(iii) which distribution shall not be subject to the otherwise applicable 10-percent excise tax of Code Section 72(t)(1) on early distributions.”
 
 
 
4.           Except as expressly or by necessary implication amended hereby, the Plan shall continue in full force and effect.
 
IN WITNESS HEREOF, the Company has adopted this Amendment Number Five to the Plan effective as of the effective dates set forth above.
 
LOWE’S COMPANIES, INC.


By:          /s/Marshall A. Croom
 
Marshall A. Croom, Senior Vice President & Chief Risk Officer

 
Chairman, Administrative Committee of Lowe’s Companies, Inc.

 
 
 

 

Exhibit 10.21
AMENDMENT NUMBER ONE
TO THE
LOWE’S COMPANIES, INC.
DIRECTORS’ DEFERRED COMPENSATION PLAN
 

 
THIS AMENDMENT NUMBER ONE to the Lowe’s Companies, Inc. Directors’ Deferred Compensation Plan, as adopted effective as of July 1, 1994 (the “ Plan ”), is adopted by Lowe’s Companies, Inc. (the “ Company ”) effective as of January 31, 2009.
 
W I T N E S S E T H:
 
WHEREAS, the Company wishes to amend the Plan to change the interest crediting rate on Deferred Cash Benefits;
 
NOW THEREFORE , the Section 7 of the Plan is hereby amended effective as of January 31, 2009 to read as follows:
 
             “7.            DEFERRED CASH BENEFITS .
 
   Deferred Cash Benefits will be set up in a Deferred Cash Account for each Participant and credited with interest calculated in the same manner and at the same rate as interest on amounts invested in the short-term interest fund option available to employees participating in the Lowe’s 401(k) Plan, a tax-qualified, defined contribution plan sponsored by the Company.  Deferred Cash Benefits are credited to the applicable Participant’s Deferred Cash Account as of the day they would have been paid but for the deferral.  Interest is credited on the first day of each month based on the Deferred Cash Account balance at the end of the preceding day.”
 
IN WITNESS WHEREOF, this Amendment Number One has been executed on the 12 th day of November, 2009, effective as of the date specified herein.
 

 
LOWE’S COMPANIES, INC.
 

 

 
By:        /s/ Maureen K. Ausura
Maureen K. Ausura
Senior Vice President, Human Resources
 

 
 

 

Exhibit 12.1
Lowe’s Companies, Inc.
                   
Statement Re Computation of Ratio of Earnings to Fixed Charges
                   
In Millions, Except Ratio Data
                   
                                 
     
Fiscal Years Ended On
 
   
February 3,
 
February 2,
 
February 1,
 
January 30,
 
January 29,
 
   
2006
 
2007
 
2008
 
2009
 
2010
 
                                 
Earnings:
                               
  Earnings Before Income Taxes
    $ 4,496     $ 4,998     $ 4,511     $ 3,506     $ 2,825  
  Add: Fixed Charges
      340       344       424       479       468  
  Less: Capitalized Interest
      (28 )     (32 )     (65 )     (36 )     (19 )
    Adjusted Earnings
    $ 4,808     $ 5,310     $ 4,870     $ 3,949     $ 3,274  
                                           
Fixed Charges:
                                         
  Interest Expense (1)
      231       238       301       346       331  
  Rental Expense (2)
      109       106       123       133       137  
    Total Fixed Charges
    $ 340     $ 344     $ 424     $ 479     $ 468  
                                           
                                           
Ratio of Earnings to Fixed Charges
      14.1       15.4       11.5       8.2       7.0  
                                           
                                           
(1) Interest accrued on uncertain tax positions is excluded from Interest Expense in the computation of Fixed Charges.
 
                                           
(2) The portion of rental expense that is representative of the interest factor in these rentals.
 

 
 
 

 

Exhibit 13
 
 
 

-   Table of Contents -
 
 
 

 
 

 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended January 29, 2010 (our fiscal years 2009, 2008 and 2007).  Each of the fiscal years presented contains 52 weeks of operating results.  Unless otherwise noted, all references herein for the years 2009, 2008 and 2007 represent the fiscal years ended January 29, 2010, January 30, 2009, and February 1, 2008, 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 that have been prepared in accordance with accounting principles generally accepted in the United States of America.  This discussion and analysis is presented in seven sections:

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

EXECUTIVE OVERVIEW

External Factors Impacting Our Business

The external pressures facing our industry continued in 2009, as the effects of declining home prices, rising unemployment and general economic uncertainty led to a reduction in consumer confidence and hesitancy among consumers to spend on discretionary projects.  Unemployment increased from approximately 7.7% at the end of 2008 to 9.7% at the end of 2009, foreclosure rates increased over 20% compared to 2008, and home prices continued to decline, though at a slower pace. As a result, consumers have reordered their priorities and have become more deliberate in their spending decisions, as evidenced by the significant decline in the rate of consumer spending, and the increase in the savings rate to more than 4.0%.  Consumers have also shifted to more Do-It-Yourself (DIY) projects; balancing the tradeoffs of convenience versus the cost.  In many cases, consumers have reduced the scope of their projects or are trading down, while still looking for high quality.  As the consumers’ priorities have shifted, we are focused on understanding how they are making their spending decisions.  Our surveys through secondary research indicate that the home is still very important to consumers and it is still most consumers’ largest asset, even with the declines in home values they have suffered over recent years.  And more importantly, the psychological attachment to the home and what it stands for remains strong.

Highlighting the impact of the current economic environment and consumer behavior on our business, comparable store sales declined 6.7% in 2009.  While customer transactions were down slightly from the prior year, comparable store average ticket declined 5.7%, and tickets greater than $500 declined 11.3% during 2009.

During the second half of 2009, we saw some signs of improvement, specifically improving trends in comparable store sales, including improvements in larger ticket sales. This resulted in a 1.6% decline in comparable store sales for the fourth quarter of 2009, which was our best performance in over three years. During the quarter, we also saw significant sequential improvement in bigger ticket projects and above-average comparable store Installed and Special Order Sales. We view this as an encouraging sign regarding consumers’ willingness to take on larger, more discretionary projects.  Our most recent quarterly survey indicated that homeowners are less likely to delay major product purchases than in the recent past.


 
 

 

Business Strategy

Managing through the Economic Downturn

Our goal remains to drive profitable market share gains during these challenging times as the economy begins to recover.  In order to do so, we continue to focus on customer service, effective management of working capital, and driving cost efficiencies.  According to third-party estimates, we gained approximately 100 basis points of total store unit market share during calendar year 2009, and approximately 400 basis points during the downturn over the past four years.  This is evidence of our commitment to customer service, compelling product offering, and our ability to capitalize on the evolving competitive landscape.

Customer service continues to be a primary focus for driving profitable sales and market share gains.  Through the economic downturn as consumers continued to postpone larger discretionary projects, we have seen resurgence in the DIY trend with smaller repair and maintenance projects in such areas as outdoor and seasonal products, paint, hardware, electrical and plumbing repair. Since some homeowners have taken on their first DIY project in a few years, many are coming to Lowe's not only for products, but for information on how to successfully complete their home-improvement projects. Accordingly, we have added informational project boards in key departments in our stores, as well as how-to videos on Lowes.com, to provide customers information and tips needed to successfully complete these projects.  In 2009, we also made changes to staffing plans and inventory levels to ensure we were well positioned to serve the DIY customer.  In all sales environments, we remain committed to staffing our stores with knowledgeable employees to provide the service that our customers have come to expect.  We know that leadership and great people are the foundation of our success. During 2009, the average tenure of a Lowe’s store manager increased to more than eight years, providing an experienced and knowledgeable leadership base.  We continue to refine and improve our “Customer Focused” program, which measures each store’s performance relative to key components of customer satisfaction, including selling skills, Installed Sales, and checkout experience.  Our customer service scores, measured by our quarterly Customer Focused process, have never been higher.

During the year, we planned our inventory purchases more conservatively across seasonal categories.  We maintained a competitive assortment in Trim-a-Tree and experienced strong sell through, which resulted in fewer markdowns of these products.  In tools, we purchased more core products to minimize markdowns.  These efforts helped us to continue to increase margins and effectively manage our working capital during the downturn.  As a result, we ended the year with 3.6% lower comparable store inventory compared to 2008.

In addition, during 2009, in light of the current economic cycle, we re-evaluated our future store expansion plans to ensure we were making the most effective use of our capital, which resulted in a reduction in the number of stores we expect to open in 2010, as well as the discontinuation of certain future store projects. The principles that drive our store-expansion plans include a focus on high-volume, metro-market opportunities, particularly in markets where we have minimal coverage, projects that minimize the effects of cannibalization, and projects that will allow us to maintain consistently strong returns on our new store capital investments.

For the past three years during the soft sales environment, we have made decisions to control expenses that have allowed us to maintain profitability while continuing to provide strong customer service. Our largest expense is payroll, and we plan store payroll hours proportionate to sales volumes and, even more specifically, to the sales volumes of individual departments within our stores.  Our goal is to manage our payroll expense without sacrificing customer service.  One of the efficiencies implemented in the fourth quarter is our Facility Service Associate position. This position will help ensure we maintain our shopping environment by having better execution of the general maintenance of our stores, including minor store repairs.  In conjunction with this new position we identified the opportunity to centralize and consolidate our facilities service agreements across our footprint, which allowed us to get better pricing on these contracts.  Lastly, we continue to focus our marketing efforts on advertising effectiveness.  We have reduced spending on mass media as the Lowe’s brand gained national awareness and market share, and increased more targeted advertising campaigns including Creative Ideas, internet search and direct mail. We continue to focus on our value messages combined with our Everyday Low Price strategy which continues to resonate well with customers.  These measured steps helped us leverage our marketing expense as a percent of sales during 2009.

 
 
 

 
 
 
Preparing for Economic Recovery

While uncertainty remains, we are encouraged by the results we achieved in the fourth quarter of 2009 and believe that the worst of the economic cycle is likely behind us.  We know that the path to economic recovery will occur at different times and at different rates across all the markets in which we compete.  As a result, we have several initiatives underway to ensure we are best positioned to drive results and gain market share throughout the recovery.

Driven by our commitment to manage the business for the long term, during 2009 we added a Project Specialist-Exteriors position in 1,400 of our stores to capture a larger share of products like roofing, siding, fencing and windows, whose characteristics lend themselves to in-home selling. To continue to grow our Commercial Business Customer (CBC) sales, we also added a District Commercial Account Specialist program and launched a Lowe’s Business Rewards card with American Express to help us better connect with, and become more relevant to, the larger commercial customer. 

Improving customer service and inventory management have always been priorities, but have been especially critical during the economic downturn.  Our multi-year Flexible Fulfillment initiative takes that one step further, and will enable us to better meet customers' needs by better leveraging our entire network's inventory.  Once these systems are in place, it will allow the sale of product in any Lowe's location or Lowes.com to be fulfilled and delivered to the customers’ homes from the most efficient location in the network.  Our goal is to make this a seamless process for the customer and at the same time leverage the inventory that we have throughout our network.

Looking forward to 2010, we are positioning ourselves to capitalize as long term economic conditions improve.  However, we are also focused on shorter term opportunities; including the U.S. Department of Energy approved Energy-Star qualified appliance incentive programs that are currently being offered to consumers by each U.S. state and territory through mid-2010.  These rebates are being funded with $300 million from the American Recovery and Reinvestment Act of 2009. Under this program, eligible consumers can receive rebates to purchase new energy-efficient appliances when they replace used appliances.  We have a cross functional team in place to ensure we have the best execution to be able to capitalize on any opportunities provided by the upcoming government programs.
 
OPERATIONS

The following tables set forth the percentage relationship to net sales of each line item of the consolidated statements of earnings, as well as the percentage change in dollar amounts from the prior year. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.


 
 

 
 

               
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year
   
Percentage Increase / (Decrease) in Dollar
Amounts from Prior Year
 
   
2009
   
2008
   
2009 vs. 2008
   
2009 vs. 2008
 
Net sales
    100.00 %     100.00 %     N/A       (2.1 )%
Gross margin
    34.86       34.21       65       (0.2 )
Expenses:
                               
Selling, general and administrative
    24.75       22.96       179       5.5  
Store opening costs
    0.10       0.21       (11 )     (51.7 )
Depreciation
    3.42       3.19       23       4.9  
Interest - net
    0.61       0.58       3       2.4  
Total expenses
    28.88       26.94       194       4.9  
Pre-tax earnings
    5.98       7.27       (129 )     (19.4 )
Income tax provision
    2.20       2.72       (52 )     (20.5 )
Net earnings
    3.78 %     4.55 %     (77 )     (18.8 )%
                                 
EBIT margin 1
    6.59 %     7.85 %     (126 )     (17.8 )%
                                 
                   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Year
 
      2008       2007    
2008 vs. 2007
   
2008 vs. 2007
 
Net sales
    100.00 %     100.00 %     N/A       (0.1 )%
Gross margin
    34.21       34.64       (43 )     (1.3 )
Expenses:
                               
Selling, general and administrative
    22.96       21.78       118       5.3  
Store opening costs
    0.21       0.29       (8 )     (27.5 )
Depreciation
    3.19       2.83       36       12.7  
Interest - net
    0.58       0.40       18       44.3  
Total expenses
    26.94       25.30       164       6.4  
Pre-tax earnings
    7.27       9.34       (207 )     (22.3 )
Income tax provision
    2.72       3.52       (80 )     (23.0 )
Net earnings
    4.55 %     5.82 %     (127 )     (21.8 )%
                                 
EBIT margin 1
    7.85 %     9.74 %     (189 )     (19.5 )%

Other Metrics
 
2009
   
2008
   
2007
 
Comparable store sales decrease
    (6.7 )%     (7.2 )%     (5.1 )%
Total customer transactions (in millions)
    766       740       720  
Average ticket
  $ 61.66     $ 65.15     $ 67.05  
                         
At end of year:
                       
Number of stores
    1,710       1,649       1,534  
Sales floor square feet (in millions)
    193       187       174  
Average store size selling square feet (in thousands)
    113       113       113  
                         
Return on average assets 
    5.3 %     6.8 %     9.5 %
Return on average shareholders' equity
    9.5 %     12.7 %     17.7 %
 
1 EBIT margin is defined as earnings before interest and taxes as a percentage of sales (operating margin).

 
 
 

 


2 A comparable store is defined as a store that has been open longer than 13 months.   A store that is identified for relocation is no longer considered comparable one month prior to its relocation.  The relocated store must then remain open longer than 13 months to be considered comparable.
3 Average ticket is defined as net sales divided by the total number of customer transactions.
4 Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period.
5 Return on average assets is defined as net earnings divided by average total assets for the last five quarters.
6 Return on average shareholders’ equity is defined as net earnings divided by average shareholders’ equity for the last five quarters.

 
2009 Compared to 2008

Net sales – Reflective of the continued challenging sales environment, net sales decreased 2.1% to $47.2 billion in 2009.  Comparable store sales declined 6.7% in 2009 compared to a decline of 7.2% in 2008.  Total customer transactions increased 3.4% compared to 2008, driven by our store expansion program.  However, average ticket decreased 5.4% to $61.66, primarily as a result of fewer project sales.  Comparable store customer transactions declined 1.0%, and comparable store average ticket declined 5.7% compared to 2008.
 
Customers continued to focus on routine maintenance and repairs instead of larger discretionary projects during 2009.  We experienced solid sales performance in paint and nursery as a result of the continued willingness of homeowners to take on smaller DIY projects to maintain their homes and improve their outdoor space.  The paint category had positive comparable store sales performance for each quarter during 2009.  Appliances also performed better than our average comparable store sales change driven by attractive value and customers’ willingness to invest in products that increase energy efficiency.  However, certain of our other categories, including windows & walls, cabinets & countertops, and millwork, which are more discretionary in nature, experienced double-digit declines in comparable store sales for the year. We also experienced continued weakness in other categories, including rough electrical, lumber, and outdoor power equipment which also experienced double-digit declines in comparable store sales driven by comparisons to last year’s hurricane-related spending.

Due to consumers’ continued hesitancy to take on larger discretionary projects, we experienced higher than average declines within all specialty sales categories during 2009.  Special Order Sales had a 15.8% decline in comparable store sales, due to weakness in cabinets & countertops, windows & walls, lighting and millwork.  Comparable store Installed Sales declined 11.4% for 2009.  However, both Special Order Sales and Installed Sales experienced sequential improvement in the third quarter of 2009, and positive comparable store sales in the fourth quarter of 2009, as the economic pressures lessened.  Sales to Commercial Business Customers declined 9.1% in 2009 driven by continued project delays within the remodel and repair businesses.

From a geographic market perspective, we experienced continued pressure from the declining housing market, with the most pronounced declines in the Mid-Atlantic and Florida markets for the year.  Many areas were impacted by several years of housing pressure as well as the financial markets.  However, we have seen evidence of broad-based stabilization, as we experienced sequential improvement in comparable store sales for all 50 states from the third to the fourth quarter, and 26 states had positive comparable results in the fourth quarter.  For 2009, the northeast and north-central markets performed above the Company average, and for the fourth quarter of 2009 these areas delivered positive comparable store sales results. As a result, we experienced a comparable store sales decline of 1.6% for the fourth quarter, compared to a decline of 6.7% for the year.

Gross margin - For 2009, gross margin of 34.86% represented a 65 basis point increase from 2008.  Margin rate improvement contributed approximately 52 basis points of this increase, primarily driven by a moderating promotional environment and decreased seasonal markdowns.  The seasonal living category experienced strong margin increases compared to the prior year driven by reduced markdowns as a result of rationalizing purchase levels earlier in the year.  The flooring and lighting product categories also experienced strong improvement compared to the prior year driven by the more rational promotional environment and our decision to not repeat certain prior year promotions. In addition, margin was positively impacted by lower inventory shrink, which provided 12 basis points of leverage.


 
 

 
 
 
For the fourth quarter of 2009, gross margin of 34.95% represented a 122 basis point increase from the fourth quarter of 2008.  In the fourth quarter of 2008, we experienced lower margin rates as a result of our efforts to clear seasonal inventory in our seasonal living and tools categories, as well as markdowns associated with our decision to exit wallpaper.  In addition, there has been a more rational promotional environment in the current year, which positively impacted the seasonal living, windows & walls and lighting categories.

SG&A - The increase in SG&A as a percentage of sales from 2008 to 2009 was primarily driven by de-leverage of 61 basis points in store payroll. As sales per store declined, an increased number of stores met the base staffing hours threshold, which increased the proportion of fixed-to-total payroll.  Although this created pressure on earnings, in the long-term it ensures that we maintain the high service levels that customers have come to expect from Lowe’s, and will ensure we have a knowledgeable and engaged team in position as consumer demand stabilizes.   We also experienced de-leverage of approximately 40 basis points in bonus expense attributable to higher achievement against performance targets in the current year.  As a result of current year performance and continued expansion rationalization, we experienced 20 basis points of de-leverage associated with the write-off of new store projects that we are no longer pursuing and long-lived asset impairment charges.  Employee insurance costs also de-leveraged 18 basis points as a result of rising health care expenses, higher enrollment and higher administrative costs.  In the current year, credit programs de-leveraged 16 basis points due to increases in aged losses and bankruptcies as a result of higher unemployment and credit market tightening.  Additionally, we experienced de-leverage of approximately 16 basis points in fixed expenses such as property taxes, utilities and rent during the year as a result of sales declines.  For the fourth quarter of 2009, SG&A de-leveraged 103 basis points as compared to the fourth quarter of 2008.  The de-leverage was primarily attributable to the same factors that contributed to the de-leverage in SG&A for the full year.

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 $49 million in 2009, compared to $102 million in 2008.  These costs are associated with the opening of 62 stores in 2009, as compared with the opening of 115 stores in 2008.  Store opening costs for stores opened during both 2009 and 2008 averaged approximately $0.8 million per store.  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 23 basis points as a percentage of sales in 2009.  This de-leverage was driven by the comparable store sales declines and the addition of 62 new stores in 2009.  Property, less accumulated depreciation, decreased to $22.5 billion at January 29, 2010, compared to $22.7 billion at January 30, 2009.  At January 29, 2010, and January 30, 2009, we owned 88% of our stores which included stores on leased land.

Interest - Net interest expense is comprised of the following:

(In millions)
 
2009
   
2008
 
Interest expense, net of amount capitalized
  $ 300     $ 314  
Amortization of original issue discount and loan costs
    4       6  
Interest income
    (17 )     (40 )
Interest - net
  $ 287     $ 280  

Net interest expense increased primarily as a result of the lower interest income due to lower interest rates and lower capitalized interest associated with fewer stores under construction, partially offset by lower interest associated with favorable tax settlements during the year.

Income tax provision - Our effective income tax rate was 36.9% in 2009 versus 37.4% in 2008.  The decrease in the effective tax rate was primarily due to favorable state tax settlements.


 
 

 


2008 Compared to 2007

Net sales – Reflective of the challenging sales environment, net sales decreased 0.1% to $48.2 billion in 2008.  Comparable store sales declined 7.2% in 2008 compared to a decline of 5.1% in 2007.  Total customer transactions increased 2.8% compared to 2007, driven by our store expansion program.  However, average ticket decreased 2.8% to $65.15, as a result of fewer project sales.  Comparable store customer transactions declined 4.1%, and comparable store average ticket declined 3.1% compared to 2007.

The sales weakness we experienced was most pronounced in larger discretionary projects and was the result of dramatic reductions in consumer spending.  Certain of our project categories, including cabinets & countertops and millwork, had double-digit declines in comparable store sales for 2008.  These two project categories together with flooring were approximately 17% of our total sales in 2008.  This is comparable to 2002 levels, after having peaked at nearly 18.5% in 2006.  We also experienced continued weakness in certain of our style categories, such as fashion plumbing, lighting and windows & walls.  These product categories are also typically more discretionary in nature and delivered double-digit declines in comparable store sales for the year.

Due to consumers’ hesitancy to take on larger discretionary projects, we experienced mixed results within Specialty Sales during the year.  Special Order Sales delivered a 9.5% decline in comparable store sales, due to continued weakness in cabinets & countertops, fashion plumbing, lighting and millwork.  Installed Sales performed above our average comparable store sales change with a decline of 6.0% for 2008.  However, we experienced low double-digit declines in comparable store sales in the third and fourth quarters of 2008 as the economic environment worsened.  Commercial Business Customer sales continued to deliver above-average comparable store sales throughout this industry downturn as a result of our targeted efforts to focus on the professional tradesperson, property maintenance professional and the repair/remodeler.

We experienced solid sales performance due to increased demand for hurricane-related products, which helped drive a comparable store sales increase in building materials and above-average comparable store sales changes in outdoor power equipment and hardware.  Favorable comparisons due to 2007’s drought conditions contributed to above-average comparable store sales changes in our lawn & landscape products and nursery categories.  The continued willingness of homeowners to take on smaller projects to improve their outdoor space and maintain their homes also contributed to the above-average comparable store sales change in our nursery category, as well as in paint and home environment.  Other categories that performed above our average comparable store sales change included appliances and rough plumbing, while flooring and seasonal living performed at approximately the overall corporate average.

From a geographic market perspective, we experienced a wide range of comparable store sales performance during the first three quarters of 2008.  Markets in the Western U.S. and Florida, which include some of the markets most pressured by the declining housing market, experienced double-digit declines in comparable store sales during each of the first three quarters of the year.  Contrasting those markets we saw solid sales results in our markets in Texas, Oklahoma, certain areas of the Northeast and parts of the upper Midwest and Ohio Valley during the same period.  However, in the fourth quarter of 2008, the economic pressures on consumers intensified as unemployment swelled, resulting in a further decline in consumer confidence and consumer spending.  This impacted all of our geographic markets, and resulted in a comparable store sales decline of 9.9% for the fourth quarter, compared to a decline of 7.2% for the year.

Gross margin - For 2008, gross margin of 34.21% represented a 43-basis-point decrease from 2007.  This decrease was primarily driven by carpet installation and other promotions, which negatively impacted gross margin by approximately 21 basis points.  We also saw a decline of approximately 14 basis points due to higher fuel prices during the first half of the year and de-leverage in distribution fixed costs.  Additionally, markdowns associated with our decision to exit wallpaper reduced gross margin by approximately three basis points.  The de-leverage from these factors was partially offset by a positive impact of approximately 12 basis points from lower inventory shrink and approximately four basis points attributable to the mix of products sold.

SG&A - The increase in SG&A as a percentage of sales from 2007 to 2008 was primarily driven by de-leverage of 70 basis points in store payroll. As sales per store declined, additional stores met the base staffing hours threshold, which increased the proportion of fixed-to-total payroll.  Although this created short-term pressure on earnings, in the long-term
 
 
 
 

 
 
 
it ensured that we maintained the high service levels that customers have come to expect from Lowe’s.  The resulting de-leverage in store payroll was partially offset by leverage of 31 basis points of in-store service expense, due to the shifting of certain tasks from third-party, in-store service groups to store employees.  The offsetting impact of these two factors resulted in net de-leverage of 39 basis points.  We  experienced de-leverage of approximately 21 basis points in fixed expenses such as property taxes, utilities and rent during the year as a result of softer sales.  Additionally, we experienced 11 basis points of de-leverage associated with the write-off of new store projects that we are no longer pursuing and a long-lived asset impairment charge for open stores.  We also experienced de-leverage of approximately nine basis points in bonus expense attributable to higher achievement against performance targets in 2008, and de-leverage of seven basis points in retirement plan expenses due to changes in the 401(k) Plan that increased our matching contribution relative to the prior year.

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 $102 million in 2008, compared to $141 million in 2007.  These costs are associated with the opening of 115 stores in 2008, as compared with the opening of 153 stores in 2007 (149 new and four relocated).  Store opening costs for stores opened during the year averaged approximately $0.8 million and $0.9 million per store in 2008 and 2007, respectively.  Because store opening costs are expensed as incurred, the timing of expense recognition fluctuates based on the timing of store openings.

Depreciation - Depreciation de-leveraged 36 basis points as a percentage of sales in 2008.  This de-leverage was driven by the addition of 115 new stores in 2008 and the comparable store sales decline.  Property, less accumulated depreciation, increased to $22.7 billion at January 30, 2009, compared to $21.4 billion at February 1, 2008.  At January 30, 2009, we owned 88% of our stores, compared to 87% at February 1, 2008, which includes stores on leased land.

Interest - Net interest expense is comprised of the following:

(In millions)
 
2008
   
2007
 
Interest expense, net of amount capitalized
  $ 314     $ 230  
Amortization of original issue discount and loan costs
    6       9  
Interest income
    (40 )     (45 )
Interest - net
  $ 280     $ 194  

Interest expense increased primarily as a result of the September 2007 $1.3 billion debt issuance and lower capitalized interest associated with fewer stores under construction.

Income tax provision – Our effective tax rate was 37.4% in 2008 versus 37.7% in 2007.  The decrease in the effective tax rate was due to an increase in federal and state tax credits as a percentage of taxable income in 2008 versus the prior year.

LOWE’S BUSINESS OUTLOOK

As of February 22, 2010, the date of our fourth quarter 2009 earnings release, we expected to open 40 to 45 stores during 2010, resulting in total square footage growth of approximately 2%.  We expected total sales in 2010 to increase 4% to 6% and comparable store sales to increase 1% to 3%.  Earnings before interest and taxes as a percentage of sales (operating margin) was expected to increase 40 to 50 basis points. Depreciation expense was expected to be approximately $1.62 billion.  Diluted earnings per share of $1.30 to $1.42 were expected for the year ending January 28, 2011.  While we expect to make share repurchases during 2010, our outlook for 2010 does not assume any share repurchases.
 

 
 

 
 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash flows from operating activities continued to provide the primary source of our liquidity.  The decrease in net cash flows provided by operating activities for 2009 versus 2008 was primarily driven by lower net earnings, partially offset by working capital improvements.  The decrease in net cash used in investing activities for 2009 versus 2008 was driven by a 45% decline in property acquired due to a reduction in our store expansion program.  The increase in cash used in financing activities for 2009 versus 2008 was attributable to approximately $1.0 billion of net repayment activity in 2009 related to short-term borrowings and $500 million in share repurchases under our share repurchase program in 2009, partially offset by the redemption in June 2008 of our convertible notes.

Sources of Liquidity

In addition to our cash flows from operations, liquidity is provided by our short-term borrowing facilities.  We have a $1.75 billion senior credit facility that expires in June 2012.  The senior credit facility supports our commercial paper and revolving credit programs.  The senior credit facility has a $500 million letter of credit sublimit.  Amounts outstanding under letters of credit reduce the amount available for borrowing under the senior credit facility.  Borrowings made are unsecured and are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants, which include maintenance of a debt leverage ratio, as defined by the senior credit facility.  We were in compliance with those covenants at January 29, 2010.  Nineteen banking institutions are participating in the senior credit facility.  As of January 29, 2010, there were no outstanding borrowings or letters of credit outstanding under the senior credit facility and no outstanding borrowings under the commercial paper program.

We have a Canadian dollar (C$) denominated credit facility in the amount of C$50 million that provides revolving credit support for our Canadian operations.  This uncommitted credit facility provides us with the ability to make unsecured borrowings which are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the credit facility.  As of January 29, 2010, there were no borrowings outstanding under this credit facility.

Our debt ratings at January 29, 2010, were as follows:

Current Debt Ratings
 
S&P
   
Moody’s
   
Fitch
 
Commercial Paper
    A1       P1       F1  
Senior Debt
    A+       A1       A+  
Outlook
 
Negative
   
Stable
   
Negative
 

On March 25, 2010, Fitch affirmed our commercial paper rating at F1, affirmed our senior debt rating at A+, and changed our outlook from negative to stable.

We believe that net cash provided by operating and financing activities will be adequate for our expansion plans and for our other operating requirements over the next 12 months.  The availability of funds through the issuance of commercial paper or new debt or the borrowing cost of these funds could be adversely affected due to a debt rating downgrade, which we do not expect, 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.

Cash Requirements

Capital expenditures

Our 2010 capital budget is approximately $2.1 billion, inclusive of approximately $400 million of lease commitments, resulting in a planned net cash outflow of $1.7 billion.  Approximately 62% of the planned net cash outflow is for store
 

 
 

 
 

expansion and approximately 21% is for investment in our existing stores through resets and remerchandising.  Our store expansion plans for 2010 consist of 40 to 45 new stores and are expected to increase sales floor square footage by approximately 2%.  Approximately 93% of the 2010 projects will be owned, of which 43% will be ground-leased.  Other planned capital expenditures include investing in our distribution and corporate infrastructure, including enhancements in information technology.   

During 2009, we entered into a joint venture agreement with Australian retailer Woolworths Limited, to develop a chain of home improvement stores in Australia.  We expect to contribute approximately $100 million per year over four years to the joint venture, of which we are a one-third owner.

At January 29, 2010, we owned and operated 14 regional distribution centers.  At January 29, 2010, we also operated 15 flatbed distribution centers for the handling of lumber, building materials and other long-length items.  We are confident that our current distribution network has the capacity to ensure that our stores remain in stock and that customer demand is met.

Debt and capital

The $500 million 8.25% Notes due June 1, 2010 will be repaid with net cash provided by operating and financing activities.

Dividends declared during 2009 totaled $522 million.  The decline in cash dividend payments from $491 million in 2008 to $391 million in 2009 was primarily due to a shift in the timing of dividend payments for dividends declared in the fourth quarter of 2009.  Dividends declared in the fourth quarter of 2009 were paid in 2010 and totaled $131 million.

Our share repurchase 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.   Authorization available for share repurchases under the program during 2009 expired as of January 29, 2010.  However, on January 29, 2010, the Board of Directors authorized an additional $5 billion in share repurchases with no expiration.  We expect to utilize the $5 billion authorization over the next three years.

The ratio of debt to equity plus debt was 21.0% and 25.1% as of January 29, 2010, and January 30, 2009, respectively.

OFF-BALANCE SHEET ARRANGEMENTS
 
Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.
 

 
 

 

 
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
 
The following table summarizes our significant contractual obligations 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)
  $ 8,974     $ 791     $ 1,057     $ 445     $ 6,681  
Capitalized lease obligations
    587       66       131       124       266  
Operating leases
    6,164       409       815       787       4,153  
Purchase obligations
    673       418       193       60       2  
Total contractual obligations
  $ 16,398     $ 1,684     $ 2,196     $ 1,416     $ 11,102  
                                         
   
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
  $ 327     $ 324     $ 3     $ -     $ -  
Surety bonds
  $ 286     $ 276     $ 10     $ -     $ -  

1   Amounts do not include taxes, common area maintenance, insurance or contingent rent because these amounts have historically been insignificant.
2 Represents commitments related to certain marketing and information technology programs, purchases of merchandise inventory and construction of buildings.
3 Letters of credit are issued for the purchase of import merchandise inventories, real estate and construction contracts, and insurance programs.
4 Surety bonds are issued primarily to secure payment of workers’ compensation liability claims in states where we are self-insured.

At January 29, 2010, approximately $9 million of the reserve for uncertain tax positions (including penalties and interest) was classified as a current liability and $160 million was classified as a non-current liability.  At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months, due to uncertainties in the timing of the effective settlement of tax positions.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements and notes to consolidated financial statements presented in this annual report requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities.  We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources.  Actual results may differ from these estimates.

Our significant accounting policies are described in Note 1 to the consolidated financial statements. We believe that the following accounting policies affect the most significant estimates and management judgments used in preparing the consolidated financial statements.
 

 
 

 
 

Merchandise Inventory

Description
We record an obsolete inventory reserve for the anticipated loss associated with selling inventories below cost.  This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.  During 2009, our reserve decreased approximately $9 million to $49 million as of January 29, 2010.

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 2009, the inventory shrinkage reserve increased approximately $9 million to $138 million as of January 29, 2010.

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

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

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

Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for obsolete inventory or inventory shrinkage during the past three years.  We believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves.  However, it is possible that actual results could differ from recorded reserves.  A 10% change in the amount of products considered obsolete and, therefore, included in the calculation of our obsolete inventory reserve would have affected net earnings by approximately $3 million for 2009.  A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrinkage reserve would have affected net earnings by approximately $9 million for 2009.

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

Long-Lived Asset Impairment - Operating Stores

Description
At January 29, 2010, $19.2 billion of our long-lived assets were associated with stores currently in operation.  We review the carrying amounts of operating stores whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  When evaluating operating stores for impairment, our asset group is at an individual store level,
 

 
 

 
 

as that is the lowest level for which cash flows are identifiable.  Cash flows for individual operating stores do not include an allocation of corporate overhead.

We evaluate operating stores on a quarterly basis to determine when store assets may not be recoverable.  Our primary indicator that operating store assets may not be recoverable is consistently negative cash flow for a 12 month period for those stores that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.  Management also monitors other factors when evaluating operating stores for impairment, including individual stores’ execution of their operating plans and local market conditions, including incursion, which is the opening of either other Lowe’s stores or direct competitors’ stores within the same market.

For operating stores, a potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the store assets are less than the carrying amount of the assets.  When determining the stream of projected future cash flows associated with an individual operating store, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and occupancy expense.

An impairment loss is recognized when the carrying amount of the operating store is not recoverable and exceeds its fair value.  We generally use an income approach to determine the fair value of our individual operating stores, which requires discounting projected future cash flows.  This involves making assumptions regarding both a store’s future cash flows, as described above, and an appropriate discount rate to determine the present value of those future cash flows.  We discount our cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows.  The selected market participants represent a group of other retailers with a store footprint similar in size to ours.

We recorded operating store impairment losses of $53 million during 2009 compared to $16 million during 2008.

Judgments and uncertainties involved in the estimate
Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin and controllable expenses and assumptions about market performance.  We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate.

Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to estimate the future cash flows of operating stores during the past three years.  If the actual results of our operating stores are not consistent with the assumptions and judgments we have made in estimating future cash flows and determining asset fair values, our actual impairment losses could vary positively or negatively from our estimated impairment losses.   A 10% reduction in projected sales used to estimate future cash flows at the time that the operating stores were evaluated for impairment would have increased recognized impairment losses by $31 million.  A 10% increase in projected sales used to estimate future cash flows at the time that the operating stores were evaluated for impairment would have reduced recognized impairment losses by $3 million.  We analyzed other assumptions made in estimating the future cash flows of the operating stores evaluated for impairment, but the sensitivity of those assumptions was not significant to the estimates.

Self-Insurance

Description
We are self-insured for certain losses relating to workers’ compensation, automobile, property, general and product liability, extended warranty, 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 2009, our self-insurance liability increased approximately $41 million to $792 million as of January 29, 2010.

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

 
 

 

 
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our self-insurance liability during the past three years.  Although we believe that we have the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities.  A 10% change in our self-insurance liability would have affected net earnings by approximately $50 million for 2009.  A 100 basis point change in our discount rate would have affected net earnings by approximately $14 million for 2009.

Revenue Recognition

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

We sell separately-priced extended warranty contracts under a Lowe’s-branded program for which we are 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 other than a straight-line basis.  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 $70 million to $549 million as of January 29, 2010.

We defer revenue and cost of sales associated with transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed.  Revenue is deferred based on the actual amounts received.  We use historical gross margin rates to estimate the adjustment to cost of sales for these transactions.  During 2009, deferred revenues associated with these transactions increased $26 million to $354 million as of January 29, 2010.

Judgments and uncertainties involved in the estimate
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.

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

Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to recognize revenue on our extended warranty contracts during the past three years.  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 2009 under these contracts would have affected net earnings by approximately $9 million.

We have not made any material changes in the methodology used to reverse net sales and cost of sales related to amounts received for which customers have not yet taken possession of merchandise or for which installation has not yet been completed.  We believe we have sufficient current and historical knowledge to record reasonable estimates related to the impact to cost of sales for these transactions.  However, if actual results are not consistent with our estimates or assumptions, we may incur additional income or expense.  A 10% change in the estimate of the gross margin rates applied to these transactions would have affected net earnings by approximately $6 million in 2009.
 

 
 

 

 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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

Commodity Price Risk

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

Foreign Currency Exchange Rate Risk

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

 
 

 
 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

• Our sales are dependent upon the health and stability of the general economy, which we believe is recovering slowly from a prolonged period of recession that was made worse by the severe accompanying financial/credit crisis.  Continued high rates of unemployment, the psychological effect of falling home prices, reduced access to credit and reduced consumer confidence have combined to lead to sharply reduced consumer spending, particularly on many of the discretionary, bigger-ticket products we sell.  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 mortgage financing can impact our business.

• Major weather-related events and unseasonable weather may negatively impact our sales particularly of seasonal merchandise.  Prolonged and widespread drought conditions could, for example, hurt our sales of lawn and garden and related products.

• Our expansion strategy is impacted by economic conditions, 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.  Promotional pricing and competitor liquidation activities during challenging economic periods such as we are continuing to experience may increase competition and adversely affect our business.

• 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 regulations of those countries from which we import them could interrupt our supply of imported inventory.  The current global recession from which we are beginning to recover and credit crisis that continues to some extent have adversely affected the operations and financial stability of some of our vendors by reducing their sales and restricting their access to capital.

• Our goal of increasing our market share and our commitment to keeping our prices low requires us to make substantial investments in new technology and processes whose benefits could take longer than expected to be realized and which could be difficult to implement and integrate.

• Changes in existing or new laws and regulations that affect employment/labor, trade, product safety, transportation/logistics, energy costs, health care, tax or environmental issues, could have an adverse impact, directly or indirectly, on our financial condition and results of operations.

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

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

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our Internal Control as of January 29, 2010.  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 January 29, 2010, our Internal Control is effective.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements contained in this report, was engaged to audit our Internal Control. Their report appears on page 29.
 
 
 
 

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina

We have audited the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of January 29, 2010 and January 30, 2009, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended January 29, 2010. 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 January 29, 2010 and January 30, 2009, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 29, 2010, 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 Company's internal control over financial reporting as of January 29, 2010, 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 March 30, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.


/s/ Deloitte & Touche LLP

Charlotte, North Carolina
March 30, 2010
 

 
 

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina

We have audited the internal control over financial reporting of Lowe's Companies, Inc. and subsidiaries (the "Company") as of January 29, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

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

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

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2010, 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 January 29, 2010 of the Company and our report dated March 30, 2010 expressed an unqualified opinion on those financial statements.


/s/ Deloitte & Touche LLP

Charlotte, North Carolina
March 30, 2010
 

 
 

 
 

L owe's Companies, Inc.
                                   
Consolidated Statements of Earnings
                             
                                     
(In millions, except per share and percentage data)
 
January 29,
%
   
January 30,
%
   
February 1,
%
 
Fiscal years ended on
 
2010
Sales
   
2009
Sales
   
2008
Sales
 
Net sales
 
$
47,220 
 
100.00 
%
 
$
48,230 
 
100.00 
%
 
$
48,283 
 
100.00 
%
                                     
Cost of sales
   
30,757 
 
65.14 
     
31,729 
 
65.79 
     
31,556 
 
65.36 
 
                                     
Gross margin
   
16,463 
 
34.86 
     
16,501 
 
34.21 
     
16,727 
 
34.64 
 
                                     
Expenses:
                                   
                                     
Selling, general and administrative
   
11,688 
 
24.75 
     
11,074 
 
22.96 
     
10,515 
 
21.78 
 
                                     
Store opening costs
   
49 
 
0.10 
     
102 
 
0.21 
     
141 
 
0.29 
 
                                     
Depreciation
   
1,614 
 
3.42 
     
1,539 
 
3.19 
     
1,366 
 
2.83 
 
                                     
Interest - net
   
287 
 
0.61 
     
280 
 
0.58 
     
194 
 
0.40 
 
                                     
Total expenses
   
13,638 
 
28.88 
     
12,995 
 
26.94 
     
12,216 
 
25.30 
 
                                     
Pre-tax earnings
   
2,825 
 
5.98 
     
3,506 
 
7.27 
     
4,511 
 
9.34 
 
                                     
Income tax provision
   
1,042 
 
2.20 
     
1,311 
 
2.72 
     
1,702 
 
3.52 
 
                                     
Net earnings
 
$
1,783 
 
3.78 
%
 
$
2,195 
 
4.55 
%
 
$
2,809 
 
5.82 
%
                                     
                                     
Basic earnings per common share
 
$
 1.21 
       
$
 1.50 
       
$
 1.89 
     
                                     
Diluted earnings per common share
$
 1.21 
       
$
 1.49 
       
$
 1.86 
     
                                     
Cash dividends per share
 
$
 0.355 
       
$
 0.335 
       
$
 0.290 
     
                                     
                                     
See accompanying notes to consolidated financial statements.
                         
 

 
 

 
 

L owe's Companies, Inc.
                         
Consolidated Balance Sheets
                         
                           
     
January 29,
   
%
   
January 30,
   
%
 
(In millions, except par value and percentage data)
   
2010
   
Total
   
2009
   
Total
 
Assets
                         
      Current assets:
                         
      Cash and cash equivalents
    $ 632       1.9 %   $ 245       0.8 %
      Short-term investments
      425       1.3       416       1.3  
      Merchandise inventory - net
      8,249       25.0       8,209       25.2  
      Deferred income taxes - net
      208       0.6       105       0.3  
      Other current assets
      218       0.7       215       0.6  
      Total current assets
      9,732       29.5       9,190       28.2  
      Property, less accumulated depreciation
    22,499       68.2       22,722       69.6  
      Long-term investments
      277       0.8       253       0.8  
      Other assets
      497       1.5       460       1.4  
      Total assets
    $ 33,005       100.0 %   $ 32,625       100.0 %
                                   
Liabilities and shareholders' equity
                                 
      Current liabilities:
                                 
      Short-term borrowings
    $ -       - %   $ 987       3.0 %
      Current maturities of long-term debt
      552       1.7       34       0.1  
      Accounts payable
      4,287       13.0       4,109       12.6  
      Accrued compensation and employee benefits
      577       1.7       434       1.3  
      Deferred revenue
      683       2.1       674       2.1  
      Other current liabilities
      1,256       3.8       1,322       4.1  
      Total current liabilities
      7,355       22.3       7,560       23.2  
      Long-term debt, excluding current maturities
    4,528       13.7       5,039       15.4  
      Deferred income taxes - net
      598       1.8       599       1.8  
      Other liabilities
      1,455       4.4       1,372       4.3  
      Total liabilities
      13,936       42.2       14,570       44.7  
                                   
      Commitments and contingencies
                                 
                                   
      Shareholders' equity:
                                 
      Preferred stock - $5 par value, none issued
      -       -       -       -  
      Common stock - $.50 par value;
                                 
          Shares issued and outstanding
                                 
          January 29, 2010
 1,459 
                               
          January 30, 2009
 1,470 
    729       2.2       735       2.2  
      Capital in excess of par value
      6       -       277       0.8  
      Retained earnings
      18,307       55.5       17,049       52.3  
      Accumulated other comprehensive income (loss)
    27       0.1       (6 )     -  
      Total shareholders' equity
      19,069       57.8       18,055       55.3  
      Total liabilities and shareholders' equity
    $ 33,005       100.0 %   $ 32,625       100.0 %
                                   
See accompanying notes to consolidated financial statements.
                                 
 

 
 

 
 

                                   
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 (Loss)
   
Equity
 
Balance February 2, 2007
    1,525     $ 762     $ 102     $ 14,860     $ 1     $ 15,725  
Cumulative effect adjustment
                            (8 )             (8 )
Comprehensive income:
                                               
   Net earnings
                            2,809                  
   Foreign currency translation
                                    7          
Total comprehensive income
                                            2,816  
Tax effect of non-qualified stock options exercised
                                         
   and restricted stock vested
                    12                       12  
Cash dividends declared
                            (428 )             (428 )
Share-based payment expense
                    99                       99  
Repurchase of common stock
    (76 )     (38 )     (349 )     (1,888 )             (2,275 )
Conversion of debt to common stock
    1       -       13                       13  
Employee stock options exercised
                                               
   and restricted stock issued
    5       3       61                       64  
Employee stock purchase plan
    3       2       78                       80  
Balance February 1, 2008
    1,458     $ 729     $ 16     $ 15,345     $ 8     $ 16,098  
Comprehensive income:
                                               
   Net earnings
                            2,195                  
   Foreign currency translation
                                    (13 )        
   Net unrealized investment losses
                                    (1 )        
Total comprehensive income
                                            2,181  
Tax effect of non-qualified stock options exercised
                                         
   and restricted stock vested
                    5                       5  
Cash dividends declared
                            (491 )             (491 )
Share-based payment expense
                    95                       95  
Repurchase of common stock
    -       -       (8 )                     (8 )
Conversion of debt to common stock
    -       -       1                       1  
Employee stock options exercised
                                               
   and restricted stock issued
    8       4       94                       98  
Employee stock purchase plan
    4       2       74                       76  
Balance January 30, 2009
    1,470     $ 735     $ 277     $ 17,049     $ (6 )   $ 18,055  
Comprehensive income:
                                               
   Net earnings
                            1,783                  
   Foreign currency translation
                                    32          
   Net unrealized investment gains
                                    1          
Total comprehensive income
                                            1,816  
Tax effect of non-qualified stock options exercised
                                         
   and restricted stock vested
                    (6 )                     (6 )
Cash dividends declared
                            (522 )             (522 )
Share-based payment expense
                    102                       102  
Repurchase of common stock
    (22 )     (11 )     (490 )     (3 )             (504 )
Employee stock options exercised
                                               
   and restricted stock issued
    7       3       50                       53  
Employee stock purchase plan
    4       2       73                       75  
Balance January 29, 2010
    1,459     $ 729     $ 6     $ 18,307     $ 27     $ 19,069  
                                                 
See accompanying notes to consolidated financial statements.
                                         
 

 
 

 

 
                 
Consolidated Statements of Cash Flows
                 
                   
                   
(In millions)
 
January 29,
   
January 30,
   
February 1,
 
Fiscal years ended on
 
2010
   
2009
   
2008
 
Cash flows from operating activities:
                 
     Net earnings
  $ 1,783     $ 2,195     $ 2,809  
     Adjustments to reconcile net earnings to net cash provided by operating activities:
                 
         Depreciation and amortization
    1,733       1,667       1,464  
         Deferred income taxes
    (123 )     69       2  
         Loss on property and other assets - net
    193       89       51  
         Loss on redemption of long-term debt
    -       8       -  
         Share-based payment expense
    102       95       99  
         Changes in operating assets and liabilities:
                       
           Merchandise inventory - net
    (28 )     (611 )     (464 )
           Other operating assets
    7       31       (64 )
           Accounts payable
    175       402       185  
           Other operating liabilities
    212       177       265  
     Net cash provided by operating activities
    4,054       4,122       4,347  
                         
Cash flows from investing activities:
                       
     Purchases of short-term investments
    (344 )     (210 )     (920 )
     Proceeds from sale/maturity of short-term investments
    624       431       1,183  
     Purchases of long-term investments
    (1,483 )     (1,148 )     (1,588 )
     Proceeds from sale/maturity of long-term investments
    1,160       994       1,162  
     Increase in other long-term assets
    (62 )     (56 )     (7 )
     Property acquired
    (1,799 )     (3,266 )     (4,010 )
     Proceeds from sale of property and other long-term assets
    18       29       57  
     Net cash used in investing activities
    (1,886 )     (3,226 )     (4,123 )
                         
Cash flows from financing activities:
                       
     Net (decrease) increase in short-term borrowings
    (1,007 )     (57 )     1,041  
     Proceeds from issuance of long-term debt
    10       15       1,296  
     Repayment of long-term debt
    (37 )     (573 )     (96 )
     Proceeds from issuance of common stock under employee stock purchase plan
    75       76       80  
     Proceeds from issuance of common stock from stock options exercised
    53       98       69  
     Cash dividend payments
    (391 )     (491 )     (428 )
     Repurchases of common stock
    (504 )     (8 )     (2,275 )
     Excess tax benefits of share-based payments
    -       1       6  
     Net cash used in financing activities
    (1,801 )     (939 )     (307 )
                         
Effect of exchange rate changes on cash
    20       7       -  
                         
Net increase (decrease) in cash and cash equivalents
    387       (36 )     (83 )
Cash and cash equivalents, beginning of year
    245       281       364  
Cash and cash equivalents, end of year
  $ 632     $ 245     $ 281  
                         
See accompanying notes to consolidated financial statements.
                       
 

 
 

 
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 29, 2010, JANUARY 30, 2009 AND FEBRUARY 1, 2008

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 1,710 stores in the United States and Canada at January 29, 2010.  Below are those accounting policies considered by the Company to be significant.

Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January.  Each of the fiscal years presented contained 52 weeks. All references herein for the years 2009, 2008 and 2007 represent the fiscal years ended January 29, 2010, January 30, 2009, and February 1, 2008, respectively.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All intercompany accounts and transactions have been eliminated.

Foreign Currency - The functional currencies of the Company’s international subsidiaries are primarily the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders' equity in accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions, which are included in selling, general and administrative (SG&A) expense, have not been significant.

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.  Cash and cash equivalents are carried at amortized cost on the consolidated balance sheets.  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, which have stated maturity dates in excess of 10 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 or par value put 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. The Company’s trading securities are also classified as short-term investments.  All other investments are classified as long-term. As of January 29, 2010, investments consisted primarily of municipal bonds, money market funds,  mutual funds, tax-exempt commercial paper, and certificates of deposit.  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 maintains investment securities in conjunction with certain employee benefit plans that are classified as trading securities.  These securities are carried at fair market value with unrealized gains and losses included in SG&A
 

 
 

 
 

expense.  All other investment securities are classified as available-for-sale and are carried at fair market value with unrealized gains and losses included in accumulated other comprehensive income (loss) 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, including distribution center costs, and is net of vendor funds.

The Company records an inventory reserve for the anticipated 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 timing and results of physical inventories.

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, which generally do not represent the reimbursement of specific, incremental and identifiable costs incurred by the Company to sell the vendor’s product.  These funds are treated as a reduction in the cost of inventory as the amounts are accrued, and are recognized as a reduction of cost of sales when the inventory is sold.  The Company develops accrual rates for vendor funds based on the provisions of the agreements in place.  Due to the complexity and diversity of the individual vendor agreements, the Company performs analyses and reviews historical trends throughout the year and confirms actual amounts with select vendors to ensure the amounts earned are appropriately recorded.  Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.

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.

Credit Programs - The majority of the Company’s accounts receivable arises from sales of goods and services to Commercial Business Customers. The Company has an agreement with GE Money Bank (GE) under which GE purchases at face value new commercial business accounts receivable originated by the Company and services these accounts.  This agreement ends in December 2016, unless terminated sooner by the parties.  The Company accounts for these transfers as sales of the 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 $1.6 billion in 2009, $1.7 billion in 2008, and $1.8 billion in 2007.  During 2009, 2008 and 2007, the Company recognized losses of $31 million, $38 million and $34 million, respectively, on these receivable sales as 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 January 29, 2010 and January 30, 2009, the fair value of the retained interests was determined based on the present value of expected future cash flows and was insignificant.

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 expense in the consolidated statements of earnings.

The total portfolio of receivables held by GE, including both receivables originated by GE from the Company’s proprietary credit cards and commercial business accounts receivable originated by the Company and sold to GE, approximated $6.5 billion at January 29, 2010, and $6.8 billion at January 30, 2009.

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 including interest 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 on 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. Assets under capital lease and 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 leasehold improvements are placed in service significantly after the inception of the lease, the Company depreciates these leasehold improvements over the shorter of the useful life of the leasehold assets or a term that includes lease renewal periods deemed to be reasonably assured at the time the leasehold improvements are placed into service.  The amortization of these assets is included in depreciation expense on the consolidated financial statements.

Long-Lived Asset Impairment/Exit Activities -   The carrying amounts of long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Long-lived assets held-for-use includes operating stores as well as excess properties, such as relocated stores, closed stores and other properties, which do not meet the held-for-sale criteria. A potential impairment has occurred for long-lived assets held-for-use if projected future undiscounted cash flows expected to result from the use and eventual disposition of the assets are less than the carrying amounts of the assets.  An impairment loss is recorded for long-lived assets held-for-use when the carrying amount of the asset is not recoverable and exceeds its fair value.

Excess properties that are expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria are classified as long-lived assets held-for-sale.  An impairment loss is recorded for long-lived assets held-for-sale when the carrying amount of the asset exceeds its fair value less cost to sell.  A long-lived asset is not depreciated while it is classified as held-for-sale.

For long-lived assets to be abandoned, the Company considers the asset to be disposed of when it ceases to be used.  Until it ceases to be used, the Company continues to classify the asset as held-for-use and tests for potential impairment accordingly.  If the Company commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, its depreciable life is re-evaluated.

Impairment losses are included in SG&A expense.  The Company recorded long-lived asset impairment losses of $114 million during 2009, including $53 million for operating stores and $61 million for excess properties.  The Company recorded long-lived asset impairment losses of $21 million during 2008, including $16 million for operating stores and $5 million for excess properties.  The Company recorded long-lived asset impairment losses of $28 million during 2007 for excess properties.

The net carrying amount of excess properties that do not meet the held-for-sale criteria is included in other assets (non-current) on the consolidated balance sheets and totaled $205 million and $174 million at January 29, 2010 and January 30, 2009, respectively.
 

 
 

 
 

When operating leased locations are closed, a liability is recognized for the fair value of future contractual obligations, including future minimum lease payments, property taxes, utilities and common area maintenance, net of estimated sublease income.

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 liabilities (non-current) on the consolidated balance sheets.

Accounts Payable - The Company has an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to finance payment obligations from the Company with designated third-party financial institutions.  Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the Company prior to their scheduled due dates at a discounted price to participating financial institutions.  The Company’s goal in entering into this arrangement is to capture overall supply chain savings, in the form of pricing, payment terms or vendor funding, created by facilitating suppliers’ ability to finance payment obligations at more favorable discount rates, while providing them with greater working capital flexibility.

The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under this arrangement.  However, the Company’s right to offset balances due from suppliers against payment obligations is restricted by this arrangement for those payment obligations that have been financed by suppliers.  As of January 29, 2010 and January 30, 2009, $602 million and $393 million, respectively, of the Company’s outstanding payment obligations had been placed on the accounts payable tracking system, and participating suppliers had financed $253 million and $370 million, respectively, of those payment obligations to participating financial institutions.

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 extended warranty and 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 self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience.  Although management believes it has the ability to reasonably estimate 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 establishes a liability for tax positions for which there is uncertainty as to whether or not the position will be ultimately sustained.  The Company includes interest related to tax issues as part of net interest on 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 $354 million and $328 million at January 29, 2010, and January 30, 2009, 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 $329 million and $346 million at January 29, 2010, and January 30, 2009, respectively, and these amounts are included in deferred revenue on the 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 date or dormancy fees.  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 - The Company 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.  The Company’s extended warranty deferred revenue is included in other liabilities (non-current) on the consolidated balance sheets.  Changes in deferred revenue for extended warranty contracts are summarized as follows:

       
(In millions)
 
2009
   
2008
 
Extended warranty deferred revenue, beginning of year
  $ 479     $ 407  
Additions to deferred revenue
    220       193  
Deferred revenue recognized
    (150 )     (121 )
Extended warranty deferred revenue, end of year
  $ 549     $ 479  

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 $150 million and $121 million at January 29, 2010 and January 30, 2009, respectively.  The Company’s extended warranty deferred costs are included in other assets (non-current) on the consolidated balance sheets.  All other costs, such as costs of services performed under the contract, general and administrative expenses and advertising expenses are expensed as incurred.

The liability for extended warranty claims incurred is included in other current liabilities on the consolidated balance sheets.  Changes in the liability for extended warranty claims are summarized as follows:

       
(In millions)
 
2009
   
2008
 
Liability for extended warranty claims, beginning of year
  $ 17     $ 14  
Accrual for claims incurred
    67       53  
Claim payments
    (61 )     (50 )
Liability for extended warranty claims, end of year
  $ 23     $ 17  
 

 
 

 
 
 
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 installation 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 losses and gains/losses on disposal of assets;
§   Other administrative costs, such as supplies, and travel and entertainment.


Advertising - Costs associated with advertising are charged to expense as incurred.  Advertising expenses were $750 million, $789 million and $788 million in 2009, 2008 and 2007, 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 third party delivery costs, salaries, and vehicle operations expenses relating to the delivery of products from stores to customers, are classified as SG&A expense.  Shipping and handling costs included in SG&A expense were $371 million, $378 million and $361 million in 2009, 2008 and 2007, 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 expense as incurred.

Comprehensive Income - The Company reports comprehensive income on 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.  Unrealized gains, net of tax, on available-for-sale securities classified in accumulated other comprehensive income (loss) on the consolidated balance sheets were $2 million at both of January 29, 2010 and January 30, 2009.  Foreign currency translation gains, net of tax, classified in accumulated other comprehensive income (loss) were $25 million at January 29, 2010. Foreign currency translation losses, net of tax, classified in accumulated other comprehensive income (loss) were $8 million at January 30, 2009.  The reclassification adjustments for gains/losses included in net earnings were not significant for any of the periods presented.

Recent Accounting Pronouncements - In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance which amends the derecognition guidance on accounting for transfers of financial assets.  The guidance is effective for financial asset transfers occurring in fiscal years beginning after November 15, 2009, and interim periods within those fiscal years.  The adoption of the guidance will not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued authoritative guidance which amends the consolidation guidance for variable interest entities.  The guidance is effective for fiscal years beginning after November 15, 2009, and interim periods within those
 

 
 

 

 
fiscal years.  The adoption of the guidance will not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued authoritative guidance on multiple-deliverable revenue arrangements, which addresses the unit of accounting for arrangements involving multiple deliverables.  The guidance also addresses how arrangement consideration should be allocated to separate units of accounting, when applicable, and expands the disclosure requirements for multiple-deliverable arrangements.  The guidance is effective for fiscal years beginning after June 15, 2010.  The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued authoritative guidance related to fair value measurements which requires additional disclosures about transfers into and out of Levels 1 and 2, and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements.  The guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The guidance is effective for the first reporting period, to include interim periods, beginning after December 15, 2009, except for the portion of the guidance relating to Level 3 activity, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

Segment Information  - The Company’s home improvement retail stores represent a single operating segment based on the way the Company manages its business.  Operating decisions are made at the Company level in order to maintain a consistent retail store presentation.  The Company’s home improvement retail stores 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.  The amounts of long-lived assets and net sales outside the U.S. were not significant for any of the periods presented.

Reclassifications - Certain prior period amounts have been reclassified to conform to current classifications. The long-term portion of the self-insurance liabilities, primarily for workers’ compensation, automobile, property, and general and product liability claims, of $462 million at January 30, 2009, previously classified as current on the consolidated balance sheets, has been reclassified to other liabilities (non-current).  The current portion of these self-insurance liabilities, previously reported as a single line item on the consolidated balance sheets, has been combined with other current liabilities.  The non-current portion of deferred income taxes related to these self-insurance liabilities has also been reclassified from current to non-current deferred income taxes in the consolidated balance sheets.  These changes were not material and had no impact on the consolidated statements of earnings, shareholders’ equity or cash flows for any of the periods presented.

Note 2: Fair Value Measurements and Financial Instruments -
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of the hierarchy are defined as follows:

·  
Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities

·  
Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

·  
Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities


 
 

 
 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following tables present the Company’s financial assets measured at fair value on a recurring basis as of January 29, 2010, and January 30, 2009, classified by fair value hierarchy:
 
         
Fair Value Measurements at Reporting Date Using
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
(In millions)
 
January 29, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities
  $ 383     $ 70     $ 313     $ -  
Trading securities
    42       42       -       -  
Total short-term investments      425       112       313       -  
 
                               
Available-for-sale securities
    277       -       277       -  
Total long-term investments   $  277     $ -       277     $ -  
 
         
Fair Value Measurements at Reporting Date Using
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other
Observable Inputs
   
Significant
Unobservable Inputs
 
(In millions)
 
January 30, 2009
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities
  $ 385     $ 81     $ 304     $ -  
Trading securities
    31       31       -       -  
Total short-term investments     416       112       304       -  
 
                               
Available-for-sale securities
    253       -       253       -  
Total long-term investments   $  253     $ -       253     $ -  

 
When available, quoted prices are used to determine fair value.  When quoted prices in active markets are available, investments are classified within Level 1 of the fair value hierarchy. The Company’s Level 1 investments primarily consist of investments in money market and mutual funds. When quoted prices in active markets are not available, fair values are determined using pricing models and the inputs to those pricing models are based on observable market inputs.  The inputs to the pricing models are typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others. The Company’s Level 2 investments primarily consist of investments in municipal bonds.
 
Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis
 
Effective January 31, 2009, the Company adopted authoritative guidance issued by the FASB for non-financial assets and liabilities measured at fair value on a non-recurring basis.

During 2009, the Company had no significant measurements of assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition, except as it relates to long-lived asset impairment.

The Company reviews the carrying amounts of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  An impairment loss is recognized when the carrying amount of the


 
 

 
 

long-lived asset is not recoverable and exceeds its fair value.  The Company estimated the fair values of long-lived assets held-for-use, including operating stores, based on the Company’s own judgments about the assumptions that market participants would use in pricing the asset and on observable market data, when available.  The Company classified these fair value measurements as Level 3.

In the determination of impairment for operating stores, the Company used an income approach to determine the fair value of individual operating stores, which required discounting projected future cash flows.   When determining the stream of projected future cash flows associated with an individual operating store, management made assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses such as store payroll and occupancy expense.  In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows.  The selected market participants represent a group of other retailers with a store footprint similar in size to the Company’s.

In the determination of impairment for excess properties held-for-use, the fair values were the estimated selling prices.  The Company determined the estimated selling prices by obtaining information from brokers in the specific markets being evaluated.  The information included comparable sales of similar assets and assumptions about demand in the market for these assets.

In the determination of impairment for excess properties held-for-sale, the fair values were the estimated selling prices, as determined for excess properties held-for-use, less cost to sell.

The following table presents the Company’s non-financial assets required to be measured at fair value on a non-recurring basis and any resulting realized losses included in earnings. Because long-lived assets are not measured at fair value on a recurring basis, certain carrying amounts and fair value measurements included in the table may reflect values at earlier measurement dates and may no longer represent the carrying amounts and fair values at January 29, 2010.

   
Fair Value Measurements - Non-recurring Basis
 
       
Operating Stores
 
Excess Properties
 
(In millions)
 
Total
 
Long-lived assets held-for-use
 
Long-lived assets held-for-use
 
Long-lived assets held-for-sale
 
For the year ended January 29, 2010:
                       
Fair value measurements
  $ 105     $ 6     $ 74     $ 25  
Previous carrying amounts
    219       59       114       46  
Impairment losses
  $ (114 )   $ (53 )   $ (40 )   $ (21 )

The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and long-term debt and are reflected in the financial statements at cost.  With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature.  Estimated fair values for long-term debt have been determined using available market information, including reported trades, benchmark yields and broker-dealer quotes.

Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capital leases and other, are as follows:
 
   
January 29, 2010
   
January 30, 2009
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
(In millions)
 
Amount
   
Value
   
Amount
   
Value
 
Long-term debt (excluding capital leases and other)
$ 4,737     $ 5,127     $ 4,726     $ 4,653  
 

 
 

 
 

NOTE 3: Investments -

The amortized costs, gross unrealized holding gains and losses, and fair values of the Company’s investment securities classified as available-for-sale at January 29, 2010, and January 30, 2009, are as follows:

   
January 29, 2010
 
Type
Amortized
 
Gross Unrealized
 
Gross Unrealized
 
Fair
 
(In millions)
Costs
 
Gains
 
Losses
 
Values
 
Municipal bonds
  $ 301     $ 2     $ -     $ 303  
Money market funds
    68       -       -       68  
Tax-exempt commercial paper
    10       -       -       10  
Certificates of deposit
    2       -       -       2  
Classified as short-term
    381       2       -       383  
Municipal bonds
    275       2       -       277  
Classified as long-term
    275       2       -       277  
Total
  $ 656     $ 4     $ -     $ 660  
                                 
   
January 30, 2009
 
Type
Amortized
 
Gross Unrealized
 
Gross Unrealized
 
Fair
 
(In millions)
Costs
 
Gains
 
Losses
 
Values
 
Municipal bonds
  $ 296     $ 3     $ -     $ 299  
Money market funds
    79       -       -       79  
Tax-exempt commercial paper
    5       -       -       5  
Certificates of deposit
    2       -       -       2  
Classified as short-term
    382       3       -       385  
Municipal bonds
    248       5       -       253  
Classified as long-term
    248       5       -       253  
Total
  $ 630     $ 8     $ -     $ 638  

The proceeds from sales of available-for-sale securities were $1.2 billion, $1.0 billion and $1.2 billion for 2009, 2008 and 2007, 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 bonds classified as long-term at January 29, 2010, will mature in one to 38 years, based on stated maturity dates.

Effective February 2, 2008, the Company adopted authoritative guidance issued by the FASB that provides entities with an option to measure many financial instruments and certain other items at fair value.  Under this guidance, unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each reporting period.  Upon adoption, the Company elected the fair value option for certain pre-existing investments, which had a carrying value of $42 million and were accounted for as available-for-sale securities included in long-term investments in the consolidated balance sheet at February 2, 2008.   Subsequent to the election, these investments are reported as trading securities, which are included in short-term investments, and were $42 million and $31 million at January 29, 2010 and January 30, 2009, respectively.  For the year ended January 29, 2010, net unrealized gains for trading securities totaled $7 million.  For the year ended January 30, 2009, net unrealized losses for trading securities totaled $14 million.  Unrealized gains and losses on trading securities were included in SG&A expense.  Cash flows from purchases, sales and maturities of trading securities continue to be included in cash flows from investing activities in the consolidated statements of cash flows because the nature and purpose for which the securities were acquired has not changed as a result of the adoption of this guidance.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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 $186 million at January 29, 2010 and

 
 

 
 

$214 million at January 30, 2009.  Restricted balances included in long-term investments were $202 million at January 29, 2010 and $143 million at January 30, 2009.

Note 4: Property and Accumulated Depreciation -
 
                   
Property is summarized by major class in the following table:
 
                   
   
Estimated
             
   
Depreciable
 
January 29,
 
January 30,
 
(In millions)
 
Lives, In Years
 
2010
 
2009
 
Cost:                        
Land
    N/A     $ 6,519     $ 6,144  
Buildings
    7-40       12,069       11,258  
Equipment
    3-15       8,826       8,797  
Leasehold improvements
    5-40       3,818       3,576  
Construction in progress
    N/A       1,036       1,702  
Total cost
            32,268       31,477  
Accumulated depreciation
            (9,769 )     (8,755 )
Property, less accumulated depreciation
          $ 22,499     $ 22,722  

Included in net property are assets under capital lease of $519 million, less accumulated depreciation of $333 million, at January 29, 2010, and $521 million, less accumulated depreciation of $318 million, at January 30, 2009.
 
Note 5: Short-Term Borrowings and Lines of Credit -
 
The Company has a $1.75 billion senior credit facility that expires in June 2012.  The senior credit facility supports the Company’s commercial paper and revolving credit programs.  The senior credit facility has a $500 million letter of credit sublimit.  Amounts outstanding under letters of credit reduce the amount available for borrowing under the senior credit facility.  Borrowings made under the senior credit facility are unsecured and are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the senior credit facility.  The senior credit facility contains certain restrictive covenants, which include maintenance of a debt leverage ratio as defined by the senior credit facility.  The Company was in compliance with those covenants at January 29, 2010.  Nineteen banking institutions are participating in the senior credit facility.  As of January 29, 2010, there were no borrowings outstanding under the commercial paper program.  As of January 30, 2009, there was $789 million outstanding under the commercial paper program, and the weighted-average interest rate on the outstanding commercial paper was 0.84%.  There were no letters of credit outstanding under the senior credit facility as of January 29, 2010 or January 30, 2009.

The Company had a Canadian dollar (C$) denominated credit facility in the amount of C$200 million that expired on March 30, 2009.  The outstanding borrowings at expiration were repaid with net cash provided by operating activities.  As of January 30, 2009, there was C$199 million, or the equivalent of $162 million, outstanding under the credit facility, and the weighted-average interest rate on the short-term borrowings was 2.65%.

The Company also has a C$ denominated credit facility in the amount of C$50 million that provides revolving credit support for the Company’s Canadian operations.  This uncommitted credit facility provides the Company with the ability to make unsecured borrowings, which are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the credit facility.  As of January 29, 2010, there were no borrowings outstanding under the credit facility.  As of January 30, 2009, there was C$44 million, or the equivalent of $36 million, outstanding under the credit facility, and the weighted-average interest rate on the short-term borrowings was 1.60%.
 

 
 

 
 

NOTE 6: Long-Term Debt -

         
Range of
             
(In millions)
       
Years of
   
January 29,
   
January 30,
 
Debt Category
 
Interest Rates
   
Final Maturity
   
2010
   
2009
 
Secured debt:
                       
Mortgage notes
 
1.08 to 8.25%
   
2010 to 2018
    $ 35     $ 27  
Unsecured debt:
                           
Debentures
 
6.50 to 6.88%
   
2028 to 2029
      694       694  
Notes
    8.25%       2010       500       500  
Medium-term notes - series A
 
8.19 to 8.20%
      2022       15       15  
Medium-term notes - series B
 
7.11 to 7.61%
      2027 to 2037       217       217  
Senior notes
 
5.00 to 6.65%
   
2012 to 2037
      3,276       3,273  
Capital leases and other
         
2011 to 2031
      343       347  
Total long-term debt
                    5,080       5,073  
Less current maturities
                    (552 )     (34 )
Long-term debt, excluding current maturities
                  $ 4,528     $ 5,039  

 
1 Real properties with an aggregate book value of $66 million were pledged as collateral at January 29, 2010, for secured debt.

 
2 Approximately 46% of these medium-term notes may be put at the option of the holder on the 20th 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: 2010, $518 million; 2011, $1 million; 2012, $551 million; 2013, $1 million; 2014, $1 million; thereafter, $3.7 billion.

The Company’s debentures, notes, medium-term notes and senior notes contain certain restrictive covenants.  The Company was in compliance with all covenants of these agreements at January 29, 2010.

Senior Notes

In September 2007, the Company issued $1.3 billion of unsecured senior notes, comprised of three tranches: $550 million of 5.60% senior notes maturing in September 2012, $250 million of 6.10% senior notes maturing in September 2017 and $500 million of 6.65% senior notes maturing in September 2037.  The 5.60%, 6.10% and 6.65% senior notes were issued at discounts of approximately $2.7 million, $1.3 million and $6.3 million, respectively.  Interest on the senior notes is payable semiannually in arrears in March and September of each year until maturity, beginning in March 2008.  The discount associated with the issuance is included in long-term debt and is being amortized over the respective terms of the senior notes.  The net proceeds of approximately $1.3 billion were used for general corporate purposes, including capital expenditures and working capital needs, and for repurchases of shares of the Company’s common stock.

The senior notes issued in 2007 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 semiannual basis at specified rates. The indenture under which the 2007 senior notes were issued also contains a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change-in-control triggering event occurs.  If elected under the change-in-control provisions, the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, on such notes to the date of purchase.  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.

Upon the issuance of the senior 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.

Convertible Notes

On June 30, 2008, the Company redeemed for cash approximately $19 million principal amount, $14 million carrying amount, of its convertible notes issued in February 2001, which represented all remaining notes outstanding of such issue, at a price equal to the sum of the issuance price plus accrued original issue discount of such notes as of the redemption date ($730.71 per note).  On June 25, 2008, the Company completed a single open-market repurchase of approximately $187 million principal amount, $164 million carrying amount, of its senior convertible notes issued in October 2001 at a price of $875.73 per note.  The Company subsequently redeemed for cash on June 30, 2008, approximately $392 million principal amount, $343 million carrying amount, of its senior convertible notes issued in October 2001, which represented all remaining notes outstanding of such issue, at a price equal to the sum of the issuance price plus accrued original issue discount of such notes as of the redemption date ($875.73 per note). 

NOTE 7: Shareholders' Equity -

The Company has 5.0 million ($5 par value) 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.

Authorized shares of common stock were 5.6 billion ($.50 par value) at January 29, 2010 and January 30, 2009.

The Company has a share repurchase program that 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.  The Company repurchased 76.4 million shares at a total cost of $2.3 billion (of which $1.9 billion was recorded as a reduction in retained earnings, after capital in excess of par value was depleted) during 2007.  No common shares were repurchased under the share repurchase program during 2008. The Company repurchased 21.9 million shares at a total cost of $0.5 billion (of which $3 million was recorded as a reduction in retained earnings, after capital in excess of par value was depleted) during 2009.  Authorization available for share repurchases under the program expired as of January 29, 2010.  Authorization for up to $5 billion of share repurchases with no expiration was approved by the Company’s Board of Directors on January 29, 2010.
 
NOTE 8: Accounting for Share-Based Payment -

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 to non-employee directors, referred to as the Amended and Restated Directors’ Stock Option and Deferred Stock Unit Plan (Directors’ Plan) 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), performance-based restricted stock, restricted stock, restricted stock units, and deferred stock units, which represent nonvested stock, may be granted to key employees from the 2006 plan.  No new awards may be granted from the 2001, 1997, 1994, and the Directors’ Plans.  

Share-based awards were authorized for grant to key employees and non-employee directors for up to 169.0 million shares of common stock.  In May 2009, the 2006 plan was amended to remove limits applicable to specific types of
 

 
 

 

 
awards made under the plan and to permit grants to non-employee directors.   Up to 45.0 million shares were authorized under the ESPP.

At January 29, 2010, there were 29.5 million shares remaining available for grant under the 2006 Plan and 14.5 million shares available under the ESPP.  

The Company recognized share-based payment expense in SG&A expense on the consolidated statements of earnings totaling $102 million, $95 million and $99 million in 2009, 2008 and 2007, respectively.  The total income tax benefit recognized was $27 million, $31 million and $32 million in 2009, 2008 and 2007, respectively.
 
Total unrecognized share-based payment expense for all share-based payment plans was $105 million at January 29, 2010, of which $64 million will be recognized in 2010, $36 million in 2011 and $5 million thereafter.  This results in these amounts being recognized over a weighted-average period of 1.7 years.
 
For all share-based payment awards, the expense recognized has been adjusted for estimated forfeitures where 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.
 
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 equal to the closing market price of a share of the Company’s common stock on the date of grant.  These options are expensed on a straight-line basis over the grant vesting period, which is considered to be the requisite service period.

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.  The assumptions used in the Black-Scholes option-pricing model for options granted in the three years ended January 29, 2010, January 30, 2009 and February 1, 2008 are as follows:

   
  2009
   
 2008
   
 2007
 
Assumptions used:
                 
     Expected volatility
    36.4%-38.6%       25.0%-32.2%       22.6%-23.7%  
     Weighted-average expected volatility
    36.4%       25.1%       23.7%  
     Expected dividend yield
    0.82%-0.97%       0.56%-0.74%       0.37%-0.49%  
     Weighted-average dividend yield
    0.82%       0.56%       0.37%  
     Risk-free interest rate
    1.70%-2.08%       2.19%-3.09%       3.91%-4.57%  
     Weighted-average risk-free interest rate
    1.71%       2.19%       4.52%  
     Expected term, in years
    4       4       4  
     Weighted-average expected term, in years
    4       4       4  

The weighted-average grant-date fair value per share of options granted was $4.58, $5.25 and $8.18 in 2009, 2008 and 2007, 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 $8 million, $17 million and $42 million in 2009, 2008 and 2007, respectively.
 

 
 

 

 
Transactions related to stock options issued under the 2006, 2001, 1997, 1994 and Directors’ plans for the year ended January 29, 2010 are summarized as follows:

             
Weighted-
       
       
Weighted-
 
Average
       
       
Average
 
Remaining
 
Aggregate
 
 
Shares
 
Exercise Price
 
Term
 
Intrinsic Value
 
 
(In thousands)
 
Per Share
 
(In years)
 
(In thousands) 1
 
Outstanding at January 30, 2009
    25,161     $ 27.26              
Granted
    5,036       15.94              
Canceled, forfeited or expired
    (4,268 )     23.25              
Exercised
    (2,759 )     19.88              
Outstanding at January 29, 2010
    23,170       26.42       3.48     $ 29,697  
Vested and expected to vest at
                               
   January 29, 2010
    23,068       26.46       3.47       29,174  
Exercisable at January 29, 2010
    15,616     $ 29.84       2.43     $ 1,360  

1    Options for which the exercise price exceeded the closing market price of a share of the Company’s common stock
     at January 29, 2010 are excluded from the calculation of aggregate intrinsic value.
2   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 average return on beginning noncash 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.  No PARS were granted in 2009, 2008 or 2007.  No PARS vested in 2009 or 2007. The total fair value of PARS vested was approximately $6 million in 2008.  At January 29, 2010, there were 1.1 million nonvested PARS with a weighted-average grant-date fair value of $32.91 outstanding, that were issued under the 2006 and 2001 plans.

Performance-Based Restricted Stock Awards

Performance-based restricted stock awards are valued at the market price of a share of the Company’s common stock on the date of grant. In general, 25% to 100% of the awards vest at the end of a three-year service period from the date of grant based upon the achievement of a threshold and target performance goal specified in the performance-based restricted stock agreement.  The performance goal is based on targeted Company average return on noncash assets, as defined in the performance-based restricted stock agreement.  These awards are expensed on a straight-line basis over the requisite service period, based on the probability of achieving the performance goal. If the performance goal is not met, no compensation cost is recognized and any recognized compensation cost is reversed. The Company uses historical data to estimate the timing and amount of forfeitures.  No performance-based restricted stock awards were granted in 2009.  The weighted-average grant-date fair value per share of performance-based restricted stock awards granted was $23.97 and $32.18 in 2008 and 2007, respectively.  During 2008, the Company amended all 2007 performance-based restricted stock agreements, modifying the performance goal to a prorated scale.  No performance-based restricted stock awards vested in 2009, 2008 or 2007.  At January 29, 2010, there were 1.5 million performance-based restricted stock awards with a weighted average grant-date fair value of $27.30 outstanding, that were issued under the 2006 plan.
 
 
 

 
 

Restricted Stock Awards

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- to five-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 $16.03, $23.75 and $31.23 in 2009, 2008 and 2007, respectively. The total fair value of restricted stock awards vested was approximately $12 million, $18 million and $17 million in 2009, 2008 and 2007, respectively.

Transactions related to restricted stock awards issued under the 2006 and 2001 plans for the year ended January 29, 2010 are summarized as follows:

   
Shares
 (In thousands)
   
Weighted-Average
Grant-Date Fair
Value Per Share
 
Nonvested at January 30, 2009
    4,597     $ 27.40  
Granted
    4,827       16.03  
Vested
    (583 )     31.67  
Canceled or forfeited
    (384 )     21.98  
Nonvested at January 29, 2010
    8,457     $ 20.86  

Deferred Stock Units

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 vested at the end of a three- to five-year period from the date of grant and were expensed on a straight-line basis over that period, which was considered to be the requisite service period.  For non-employee directors, these awards vest immediately and are expensed on the grant date. Each non-employee Director was 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 in 2009, 2008 and 2007.  During 2009, 61,000 deferred stock units were granted under the 2006 plan and immediately vested for non-employee directors.  The weighted-average grant-date fair value per share of deferred stock units granted was $19.01, $24.00 and $32.13 in 2009, 2008 and 2007, respectively. The total fair value of deferred stock units vested was approximately $1 million, $10 million and $1 million in 2009, 2008 and 2007, respectively.  There were 0.7 million deferred stock units outstanding under the Directors’ and 2006 plans at January 29, 2010.  There were no unvested deferred stock units at January 29, 2010.

Restricted Stock Units

Restricted stock units do not have dividends rights and are valued at the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period.  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 units granted was $15.63 and $22.80 in 2009 and 2008, respectively.  No restricted stock units were granted in 2007.  No restricted stock units vested in 2009, 2008 or 2007.
 

 
 

 

 
Transactions related to restricted stock units issued under the 2006 plan for the year ended January 29, 2010 are summarized as follows:

   
Shares
(In thousands)
   
Weighted-Average Grant-Date Fair
Value Per Share
 
Nonvested at January 30, 2009
    37     $ 22.79  
Granted
    59       15.63  
Canceled or forfeited
    (4 )     19.96  
Nonvested at January 29, 2010
    92     $ 18.35  

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.  The ESPP is considered a liability award and is measured at fair value at each reporting date, and the share-based payment expense is recognized over the six-month offering period.  The Company issued 4,328,305 shares of common stock pursuant to this plan during the year ended January 29, 2010.

NOTE 9: Employee Retirement Plans -

The Company maintains a defined contribution retirement plan for its eligible employees (the 401(k) Plan).    Employees are eligible to participate in the 401(k) Plan 180 days after their original date of service.  Effective August 2008, eligible employees are automatically enrolled in the 401(k) Plan at a 1% contribution, unless the employee elects otherwise.  The Company makes contributions to the 401(k) Plan each payroll period, based upon a matching formula applied to employee contributions (company match).  Depending on the amount that a Plan participant elects to defer, the company match is a maximum of 4.25%.  Plan participants are eligible to receive the company match after completing 180 days of service.  The company match is invested identically to employee contributions and vests immediately in the participant accounts.

The Company maintains a Benefit Restoration Plan 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 employee salary deferrals and employer contributions in the form of a company match.

The Company 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 employee retirement plans of $154 million, $112 million and $91 million in 2009, 2008, and 2007, respectively.
 

 
 

 

 
NOTE 10: Income Taxes -

The following is a reconciliation of the effective tax rate to the federal statutory tax rate:

   
2009
   
2008
   
2007
 
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
State income taxes, net of federal tax benefit
    2.2       2.9       3.0  
Other, net
    (0.3 )     (0.5 )     (0.3 )
Effective tax rate
    36.9 %     37.4 %     37.7 %

The components of the income tax provision are as follows:
 
                   
(In millions)
 
2009
   
2008
   
2007
 
Current:
                 
   Federal
  $ 1,046     $ 1,070     $ 1,495  
   State
    123       166       207  
Total current
    1,169       1,236       1,702  
Deferred:
                       
   Federal
    (108 )     82       (1 )
   State
    (19 )     (7 )     1  
Total deferred
    (127 )     75       -  
Total income tax provision
  $ 1,042     $ 1,311     $ 1,702  

The tax effects of cumulative temporary differences that gave rise to the deferred tax assets and liabilities were as follows:
 
             
(In millions)
 
January 29, 2010
   
January 30, 2009
 
Deferred tax assets:
           
     Self-insurance
  $ 251     $ 221  
     Share-based payment expense
    115       95  
     Deferred rent
    75       51  
     Other, net
    223       172  
Total deferred tax assets
  $ 664     $ 539  
Valuation allowance
    (65 )     (42 )
Net deferred tax assets
  $ 599     $ 497  
                 
Deferred tax liabilities:
               
     Property
  $ (934 )   $ (977 )
     Other, net
    (55 )     (14 )
Total deferred tax liabilities
  $ (989 )   $ (991 )
                 
Net deferred tax liability
  $ (390 )   $ (494 )

The Company operates as a branch in various foreign jurisdictions and cumulatively has incurred net operating losses of $209 million and $130 million as of January 29, 2010, and January 30, 2009, respectively.  The net operating losses are subject to expiration in 2017 through 2029.  Deferred tax assets have been established for these net operating losses in the accompanying consolidated balance sheets.  Given the uncertainty regarding the realization of the foreign net deferred tax assets, the Company recorded cumulative valuation allowances of $65 million and $42 million as of January 29, 2010, and January 30, 2009, respectively.
 

 
 

 

 
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

 (In millions)
 
2009
   
2008
   
2007
 
Unrecognized tax benefits, beginning of year
  $ 200     $ 138     $ 186  
Additions for tax positions of prior years
    31       82       11  
Reductions for tax positions of prior years
    (45 )     (16 )     (81 )
Net additions based on tax positions related to the current year
    5       16       23  
Settlements
    (37 )     (19 )     (1 )
Reductions due to a lapse in applicable statute of limitations
    -       (1 )     -  
Unrecognized tax benefits, end of year
  $ 154     $ 200     $ 138  

The amounts of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate were $7 million and $40 million as of January 29, 2010, and January 30, 2009, respectively.

During 2009, the Company recognized $9 million of interest income and a $9 million reduction in penalties related to uncertain tax positions.  As of January 29, 2010, the Company had $14 million of accrued interest and $1 million of accrued penalties.  During 2008, the Company recognized $10 million of interest expense and a $3 million reduction in penalties related to uncertain tax positions.  As of January 30, 2009, the Company had $30 million of accrued interest and $9 million of accrued penalties.  During 2007, the Company recognized $3 million of interest expense and $5 million of penalties related to uncertain tax positions.

The Company does not expect any changes in unrecognized tax benefits over the next 12 months to have a significant impact on the results of operations, the financial position or the cash flows of the Company.

The Company is subject to examination by various foreign and domestic taxing authorities. During 2009, the IRS completed its examination of the Company’s 2004 and 2005 income tax returns, with the exception of certain issues that are presently under appeal.   In addition, the IRS began its examination of the Company’s U.S. federal income tax returns for 2006 and 2007.  The Company is subject to examination in major state tax jurisdictions for years 2002 forward.  The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.
 
Note 11: Earnings Per Share -

Effective January 31, 2009, the Company adopted authoritative guidance issued by the FASB that states that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method.  The retrospective application of the provisions of the guidance reduced previously reported basic earnings per common share by $0.01 for the years ended January 30, 2009 and February 1, 2008.

Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security.  The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net earnings for the period had been distributed.  Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period.  Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares as of the balance sheet date, as adjusted for the potential dilutive effect of non-participating share-based awards and convertible notes.  The following table reconciles earnings per common share for 2009, 2008, and 2007:
 
 
 
 

 
 

(In millions, except per share data)
 
2009
   
2008
   
2007
 
Basic earnings per common share:
                 
Net earnings
  $ 1,783     $ 2,195     $ 2,809  
Less: Net earnings allocable to participating securities
    (13 )     (11 )     (10 )
Net earnings allocable to common shares
  $ 1,770     $ 2,184     $ 2,799  
Weighted-average common shares outstanding
    1,462       1,457       1,481  
Basic earnings per common share
  $ 1.21     $ 1.50     $ 1.89  
Diluted earnings per common share:
                       
Net earnings
  $ 1,783     $ 2,195     $ 2,809  
Net earnings adjustment for interest on convertible notes, net of tax
    -       2       4  
Net earnings, as adjusted
    1,783       2,197       2,813  
Less: Net earnings allocable to participating securities
    (13 )     (11 )     (10 )
Net earnings allocable to common shares
  $ 1,770     $ 2,186     $ 2,803  
Weighted-average common shares outstanding
    1,462       1,457       1,481  
Dilutive effect of non-participating share-based awards
    2       3       5  
Dilutive effect of convertible notes
    -       8       21  
Weighted-average common shares, as adjusted
    1,464       1,468       1,507  
Diluted earnings per common share
  $ 1.21     $ 1.49     $ 1.86  

Stock options to purchase 21.4 million, 19.1 million, and 7.8 million shares of common stock for 2009, 2008, and 2007, respectively, were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.

NOTE 12: Leases -

The Company leases store facilities and land for certain store and non-store facilities under agreements with original terms generally of 20 years.  The leases generally contain provisions for four to six renewal options of five years each.  Some lease agreements also provide for contingent rentals based on sales performance in excess of specified minimums. Contingent rentals were not significant for any of the periods presented.  The Company subleases certain properties that are not used in its operations.  Sublease income was not significant for any of the periods presented.  Certain equipment is also leased by the Company under agreements ranging from three 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 operating leases and capitalized lease obligations having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
         
Capitalized
       
(In millions)
 
Operating
   
Lease
       
Year
 
Leases
   
Obligations
   
Total
 
2010 
  $ 409     $ 66     $ 475  
2011 
    410       66       476  
2012 
    405       65       470  
2013 
    398       65       463  
2014 
    389       59       448  
Later years
    4,153       266       4,419  
Total minimum lease payments
  $ 6,164     $ 587     $ 6,751  
Less amount representing interest
            (248        
Present value of minimum lease
                       
     payments
            339          
Less current maturities
            (34        
Present value of minimum lease payments,
                       
     less current maturities     
          $ 305          

Rental expenses under operating leases for real estate and equipment were $410 million, $399 million and $369 million in 2009, 2008 and 2007, respectively, and were recognized in SG&A expense.

NOTE 13: 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 January 29, 2010, the Company had non-cancelable commitments of $673 million related to certain marketing and information technology programs, purchases of merchandise inventory and construction of buildings.  Payments under these commitments are scheduled to be made as follows: 2010, $418 million; 2011, $128 million; 2012, $65 million; 2013, $58 million; 2014, $2 million; thereafter, $2 million.

The Company had standby and documentary letters of credit issued under banking arrangements which totaled $327 million as of January 29, 2010.  The majority of the Company’s letters of credits are issued for the purchase of import merchandise inventories, real estate and construction contracts, and insurance programs. Payments under these commitments are scheduled to be made as follows: 2010, $324 million; 2011, $2 million; 2012, $1 million.  Commitment fees ranging from 0.12% to 1.00% per annum are paid on the letters of credit amounts outstanding.

In addition, the Company had commitments under surety bonds which totaled $286 million as of January 29, 2010.  The majority of the Company’s surety bonds are issued by insurance companies to secure payment of workers’ compensation liability claims in states where the Company is self-insured.  Commitments of $276 million are scheduled to expire in 2010 and commitments of $10 million are scheduled to expire in 2011.  Premiums ranging from $3.10 to $5.50 per $1,000 of bond coverage per annum are paid on the surety bonds amounts outstanding.

During 2009, the Company entered into a joint venture agreement with Australian retailer Woolworths Limited, to develop a chain of home improvement stores in Australia.  Over the next four years, the Company will contribute $400 million to the joint venture, of which it is a one-third owner. The contributions are expected to be relatively consistent over the four year period.
 

 
 

 

 
NOTE 14: 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.  The Company purchased products from this vendor in the amount of $86 million, $92 million and $101 million for 2009, 2008, and 2007, respectively.  Amounts payable to this vendor were insignificant at January 29, 2010 and January 30, 2009.
 
NOTE 15: Other Information -

Net interest expense is comprised of the following:

(In millions)
 
2009
   
2008
   
2007
 
Long-term debt
  $ 293     $ 292     $ 247  
Short-term borrowings
    2       11       8  
Capitalized lease obligations
    32       31       32  
Interest income
    (17 )     (40 )     (45 )
Interest capitalized
    (19 )     (36 )     (65 )
Interest on tax uncertainties
    (9 )     10       3  
Other
    5       12       14  
Interest - net
  $ 287     $ 280     $ 194  

Supplemental disclosures of cash flow information:
                 
                   
(In millions)
 
2009
   
2008
   
2007
 
Cash paid for interest, net of amount capitalized
  $ 314     $ 309     $ 198  
Cash paid for income taxes
  $ 1,157     $ 1,138     $ 1,725  
Non-cash investing and financing activities:
                       
Non-cash property acquisitions, including assets acquired under capital lease
  $ 69     $ 124     $ 99  
Change in equity method investments
  $ (4 )   (15 )   -  
Conversions of long-term debt to equity
  -     1     13  
Cash dividends declared but not paid
  $ 131     $ -     $ -  


 
 

 
 

Sales by Product Category:
                                   
                                     
(Dollars in millions)
 
2009
   
2008
   
2007
 
Product Category
 
Total Sales
   
%
   
Total Sales
   
%
   
Total Sales
   
%
 
Appliances
  $ 4,541       10 %   $ 4,376       9 %   $ 4,302       9 %
Paint
    3,571       8       3,387       7       3,256       7  
Lumber
    3,243       7       3,507       7       3,559       7  
Flooring
    3,125       7       3,252       7       3,214       7  
Building materials
    2,924       6       2,970       7       2,747       6  
Millwork
    2,786       6       2,965       6       3,238       7  
Lawn & landscape products
    2,688       5       2,581       5       2,446       5  
Hardware
    2,497       5       2,514       5       2,431       5  
Fashion plumbing
    2,475       5       2,572       5       2,762       6  
Tools
    2,439       5       2,563       5       2,671       5  
Lighting
    2,406       5       2,508       5       2,700       5  
Seasonal living
    2,231       5       2,226       5       2,185       4  
Rough plumbing
    2,044       4       2,008       4       1,895       4  
Nursery
    1,897       4       1,808       4       1,687       3  
Outdoor power equipment
    1,834       4       1,963       4       1,836       4  
Cabinets & countertops
    1,715       4       1,934       4       2,180       5  
Rough electrical
    1,315       3       1,447       3       1,492       3  
Home environment
    1,189       2       1,237       3       1,222       3  
Home organization
    1,004       2       1,062       2       1,077       2  
Windows & walls
    972       2       1,055       2       1,092       2  
Other
    324       1       295       1       291       1  
Totals
  $ 47,220       100 %   $ 48,230       100 %   $ 48,283       100 %


 
 

 

 
                             
Selected Financial Data (Unaudited)
                             
                               
Selected Statement of Earnings Data
                             
(In millions, except per share data)
 
2009
   
2008
   
2007
   
2006
      2005   1
Net sales
  $ 47,220     $ 48,230     $ 48,283     $ 46,927     $ 43,243  
Gross margin
    16,463       16,501       16,727       16,198       14,790  
Net earnings
    1,783       2,195       2,809       3,105       2,765  
Basic earnings per common share
    1.21       1.50       1.89       2.02       1.78  
Diluted earnings per common share
    1.21       1.49       1.86       1.98       1.73  
Dividends per share
  $ 0.355     $ 0.335     $ 0.290     $ 0.180     $ 0.110  
                                         
Selected Balance Sheet Data
                                       
Total assets
  $ 33,005     $ 32,625     $ 30,816     $ 27,726     $ 24,604  
Long-term debt, excluding current maturities
  $ 4,528     $ 5,039     $ 5,576     $ 4,325     $ 3,499  
                                         
    Fiscal year 2005 contained 53 weeks, while all other years contained 52 weeks.
                         
 
Selected Quarterly Data
                       
(In millions, except per share data)
 
First
   
Second
   
Third
   
Fourth
 
2009
                       
Net sales
  $ 11,832     $ 13,844     $ 11,375     $ 10,168  
Gross margin
    4,196       4,823       3,890       3,554  
Net earnings
    476       759       344       205  
Basic earnings per common share
    0.32       0.51       0.23       0.14  
Diluted earnings per common share
  $ 0.32     $ 0.51     $ 0.23     $ 0.14  
                                 
                                 
(In millions, except per share data)
 
First
   
Second
   
Third
   
Fourth
 
2008
                               
Net sales
  $ 12,009     $ 14,509     $ 11,728     $ 9,984  
Gross margin
    4,166       4,982       3,985       3,368  
Net earnings
    607       938       488       162  
Basic earnings per common share
    0.42       0.64       0.33       0.11  
Diluted earnings per common share
  $ 0.41     $ 0.63     $ 0.33     $ 0.11  
 

 
 

 

 
Quarterly Stock Price Range and Cash Dividends Declared
                         
                                       
   
Fiscal 2009
 
Fiscal 2008
 
Fiscal 2007
 
   
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
 
1st Quarter
  $ 22.09   $ 13.00   $ 0.085   $ 27.18   $ 20.25   $ 0.080   $ 35.74   $ 29.87   $ 0.050  
2nd Quarter
    22.68     18.02     0.090     26.18     18.00     0.085     33.19     27.38     0.080  
3rd Quarter
    24.09     19.46     0.090     28.49     15.76     0.085     32.53     25.71     0.080  
4th Quarter
  $ 24.50   $ 19.15   $ 0.090   $ 23.73   $ 15.85   $ 0.085   $ 26.87   $ 19.94   $ 0.080  
 
As of March 26, 2010 there were 31,041 registered holders of Lowe's common stock.
 
 
 
 

 


 
Exhibit 21
 
LOWE’S COMPANIES, INC. AND SUBSIDIARY COMPANIES
     
NAME AND DOING BUSINESS AS:
 
STATE OF INCORPORATION
     
Lowe's Home Centers, Inc.
 
North Carolina
Lowe's HIW, Inc.
 
Washington
     
All other subsidiaries were omitted pursuant to Item 601 (21)(ii) of Regulation S-K under the Securities and Exchange Act of 1934, as amended.
     
 
 
 
 

 

Exhibit 23



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in:

§  
Registration Statement No. 33-29772 on Form S-8,
 
§  
Registration Statement No. 33-54499 on Form S-8,
 
§  
Registration Statement No. 333-34631 on Form S-8,
 
§  
Registration Statement No. 333-89471 on Form S-8,
 
§  
Registration Statement No. 333-73408 on Form S-8,
 
§  
Registration Statement No. 333-97811 on Form S-8,
 
§  
Registration Statement No. 333-114435 on Form S-8,
 
§  
Registration Statement No. 333-138031 on Form S-8,
 
§  
Registration Statement No. 333-143266 on Form S-8,
 
§  
Registration Statement No. 333-155748 on Form S-3ASR, and
 
§  
Registration Statement No. 333-161697 on Form S-3ASR
 
of our reports dated March 30, 2010, relating to the consolidated financial statements and financial statement schedule of Lowe's Companies, Inc. and subsidiaries (the "Company") and the effectiveness of the Company's internal control over financial reporting, appearing in and incorporated by reference in this Annual Report on Form 10-K of the Company for the fiscal year ended January 29, 2010.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina
March 30, 2010
 
 
 
 

 


Exhibit 31.1 
CERTIFICATION

I, Robert A. Niblock, certify that:
 
(1)  I have reviewed this Annual Report on Form 10-K for the fiscal year ended January 29, 2010 of Lowe's Companies, Inc.;

(2)  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4)  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

(5)  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


March 30, 2010
 
/s/ Robert A. Niblock
Date
 
Robert A. Niblock
Chairman of the Board and Chief Executive Officer

Exhibit 31.2 
CERTIFICATION

I, Robert F. Hull, Jr., certify that:
 
(1)  I have reviewed this Annual Report on Form 10-K for the fiscal year ended January 29, 2010 of Lowe's Companies, Inc.;

(2)  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4)  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

(5)  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


March 30, 2010
 
/s/ Robert F. Hull, Jr.
Date
 
Robert F. Hull, Jr.,
Executive Vice President and Chief Financial Officer
Exhibit 32.1
 
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Annual Report on Form 10-K of Lowe's Companies, Inc. (the "Company") for the fiscal year ended January 29, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert A. Niblock, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
/s/   Robert A. Niblock
 
Name: Robert A. Niblock
 
Title: Chairman of the Board and Chief Executive Officer
 
Date: March 30, 2010
Exhibit 32.2
 
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Annual Report on Form 10-K of Lowe's Companies, Inc. (the "Company") for the fiscal year ended January 29, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert F. Hull, Jr., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
1.  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
/s/   Robert F. Hull, Jr .
 
Name: Robert F. Hull, Jr.
 
Title: Executive Vice President and Chief Financial Officer
 
Date: March 30, 2010