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Item 7. Management’s Discussion and Analysis

2024-03-25 compared with 2023-03-27 · 139 added, 159 removed, 210 unchanged (59% of the section changed)

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The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the two-year period ended February 2, 2024 (our fiscal years 2023 and 2022).

Unless otherwise noted, all references herein for the years 2022, 2021, and 2020 represent the fiscal years ended February 3, 2023, January 28, 2022, and January 29, 2021, respectively.

Fiscal year 2022 contains 53 weeks of operating results compared to fiscal years 2021 and 2020, which contain 52 weeks.

Unless otherwise noted, all references herein for the years 2023, 2022, and 2021 represent the fiscal years ended February 2, 2024, February 3, 2023, and January 28, 2022, respectively.

Fiscal years 2023 and 2021 contained 52 weeks of operating results compared to fiscal year 2022, which contained 53 weeks.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

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EXECUTIVE OVERVIEW

Net sales for fiscal 2022 increased 0.8% over fiscal 2021 to $97.1 billion.

The increase in total sales was primarily driven by the 53rd week, partially offset by a decrease in comparable sales.

The 53rd week contributed approximately 1.4% to the sales growth for 2022.

Comparable sales decreased 0.9% over fiscal 2021, driven by a 7.6% decrease in comparable customer transactions, partially offset by a 6.7% increase in comparable average ticket.

Net earnings for fiscal 2022 decreased 23.8% to $6.4 billion.

Diluted earnings per common share decreased 15.5% in fiscal 2022 to $10.17 from $12.04 in fiscal 2021.

The following table highlights our annual financial results:

(in millions, except per share data)

$ 86,377 $ 97,059 $ 96,250

7,726 6,437 8,442

Diluted earnings per share

$ 13.20 $ 10.17 $ 12.04

Adjusted diluted earnings per share 2

13.09 13.81 N/A

Net cash provided by operating activities

$ 8,140 $ 8,589 $ 10,113

Capital expenditures

1,964 1,829 1,853

Repurchases of common stock 3

6,334 14,128 13,074

Cash dividend payments

2,531 2,370 1,984

1 The fiscal year ended February 3, 2023 had 53 weeks.

The fiscal years ended February 2, 2024 and January 28, 2022 had 52 weeks

2 Adjusted diluted earnings per share is a non-GAAP financial measure.

See below for additional information and a reconciliation of non-GAAP measures.

3 Repurchases of common stock on a trade-date basis.

Net sales for fiscal 2023 decreased 11.0% from fiscal 2022 to $86.4 billion.

Prior year sales included approximately $1.4 billion due to the 53rd week, as well as $5.0 billion generated by our Canadian retail business, which was sold in the fourth quarter of fiscal 2022.

Comparable sales for fiscal 2023 decreased 4.7%, consisting of a 4.6% decrease in comparable customer transactions, and a 0.1% decrease in comparable average ticket.

Net earnings for fiscal 2023 increased 20.0% to $7.7 billion.

Diluted earnings per common share increased 29.8% in fiscal 2023 to $13.20 from $10.17 in fiscal 2022.

Included in fiscal 2023 results is pre-tax income of $63 million associated with the fiscal 2022 sale of the Canadian retail business, which increased diluted earnings per share by $0.11.

Included in the fiscal 2022 results is $2.5 billion of pre-tax costs associated with the sale of the Canadian retail business consisting of long-lived asset impairment, loss on sale, and additional closing costs, which decreased diluted earnings per share by $3.64.

Adjusting for these items, adjusted diluted earnings per common share increased 14.7% to $13.81 in 2022 from diluted earnings per common share of $12.04 in 2021 (see the non-GAAP financial measures discussion).

Adjusting for these items, adjusted diluted earnings per common share decreased 5.2% to $13.09 in 2023 from adjusted diluted earnings per common share of $13.81 in 2022 (see the non-GAAP financial measures discussion).

For fiscal 2023, cash flows from operating activities were $8.1 billion, with $2.0 billion used for capital expenditures.

Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $6.3 billion of common stock and paid $2.5 billion in dividends during the year.

The Total Home strategy remained our focus for the year, which reflects our commitment to provide a full complement of products and services for Pro and DIY consumers alike, enabling a Total Home solution for every project across the home.

During the year, our continued investment in the Pro customer helped generate broad-based demand with positive comparable sales in our core Pro categories.

In the first quarter, we launched our Pro loyalty program, MVPs Pro Rewards and Partnership Program TM , which is centered on creating a partnership with our Pro customers.

In addition, throughout the year, we improved Pro product and service offerings, and enhanced product assortments to meet Pro needs.

Demand with our DIY customer was strong in core, home-improvement categories throughout the year, while discretionary DIY category performance lagged due to a short spring season, cycling unprecedented demand over the past two years, and a reduction of holiday purchases.

Our Perpetual Productivity Improvement (PPI) initiatives continued to gain efficiencies through our enhanced labor management tools, store inventory management system, and improved pricing capabilities.

Also, to date, we have converted 11 geographic areas to our market-based delivery model for big and bulky product.

In this model, product flows directly to customer homes from our distribution network, bypassing stores altogether.

We expect these initiatives and our investments in the business to deliver operating margin productivity and drive meaningful long-term shareholder value going forward.

While improving our operating discipline, we have continued to invest in our front-line associates.

In addition to the discretionary and profit-sharing bonuses awarded throughout the year, we implemented $170 million in annual wage increases effective December 2022.

These compensation investments reflect our commitment to becoming the employer of choice in retail.

With the sale of our Canadian retail business on February 3, 2023, we are focused on the transformation of our U.S.

home improvement business to further enhance our operating margin, simplify our business model, and deliver sustainable value to our shareholders.

We believe the core demand drivers of our business are disposable personal income, home price appreciation, and the age of the housing stock.

The typical homeowner today has significant equity in his or her home, while the housing

stock continues to age.

These factors, along with strong millennial household formation, elderly preference to age in place, and widespread remote work, continue to support the home improvement market, and we believe we are well-positioned to gain market share through our Total Home strategy.

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.

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Persistent macroeconomic pressures impacted our DIY customer demand in fiscal 2023, particularly in bigger-ticket purchases.

While DIY demand remains uncertain, we are committed to highlighting value and convenience, both in our stores and online, to a price-conscious consumer, while maintaining a balanced focus on profitability.

Despite lumber deflation, we generated positive Pro customer comparable sales for the year, supported by the investments we have made in our Pro customer offerings.

In addition, our Perpetual Productivity Improvement (PPI) initiatives allowed us the flexibility to control costs and respond to changes in demand.

Our omnichannel investments enabled improved technology capabilities across our stores, as well as an enhanced customer experience.

The core demand drivers of our business that we track are disposable personal income, home price appreciation, and the age of the housing stock.

Trends such as millennial household formation, elderly preference to age in place, and a persistence of remote work support the home improvement market, and we believe we are well-positioned to execute our strategic plan.

Our focus will remain on making the right investments in our Total Home strategy while executing on our PPI initiatives through the near-term market uncertainty to drive meaningful long-term shareholder value.

The following table sets forth the percentage relationship to net sales of each line item of the consolidated statements of earnings.

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

2022 2021 2022 vs.

2021 2022 vs.

Net sales 100.00 % 100.00 % N/A 0.8 %

Gross margin 33.23 33.30 (7) 0.6

Selling, general and administrative 20.94 19.01 193 11.1

Depreciation and amortization 1.82 1.73 9 6.2

Operating income 10.47 12.56 (209) (16.0)

Interest – net 1.16 0.92 24 26.8

Pre-tax earnings 9.31 11.64 (233) (19.4)

Income tax provision 2.68 2.87 (19) (6.0)

Net earnings 6.63 % 8.77 % (214) (23.8) %

Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year

Percentage Increase / (Decrease) in Dollar Amounts from Prior Year

Basis Point Increase/(Decrease) in Percentage of Net Sales

2023 2022 2021 2023 vs.

2022 2022 vs.

Net sales 100.00 % 100.00 % N/A 7.4 %

Net sales 100.00 % 100.00 % 100.00 %

Gross margin 33.39 33.23 33.30 16 (7)

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Interest – net 1.60 1.16 0.92 44 24

Loss on extinguishment of debt — 1.18 (118) (100.0)

Pre-tax earnings 11.78 9.31 11.64 247 (233)

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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.

During fiscal 2022, the Company adjusted its comparable sales metric to exclude days affected by national outages with its third-party credit and debit processor.

Excluding these days, and the corresponding prior period days, increased comparable sales by approximately 5 basis points for fiscal 2022.

The comparable sales metric for fiscal 2021 and 2020 were not impacted or adjusted by similar outages.

Other Metrics 2023 2022 1

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Average store size selling square feet (in thousands) 4

Return on average assets 5

13.9 % 17.5 % 12.4 %

Net earnings to average debt and shareholders’ (deficit)/equity 31.6 % 26.6 % 32.3 %

26.6 % 32.3 % 21.9 %

Return on invested capital 5

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1 The fiscal year ended February 3, 2023 had 53 weeks.

The fiscal years ended January 28, 2022 and January 29, 2021 had 52 weeks.

The fiscal years ended February 2, 2024 and January 28, 2022 had 52 weeks.

2 A comparable location is defined as a retail location that has been open longer than 13 months.

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Operating locations which are sold are included in comparable sales until the date of sale.

Comparable sales include online sales, which positively impacted the comparable sales increase in fiscal 2022, fiscal 2021, and fiscal 2020 by approximately 45 basis points, 150 basis points, and 565 basis points, respectively.

The comparable sales calculation for 2022 included in the preceding table was calculated using sales for a comparable 53-week period.

Comparable sales include online sales, which positively impacted comparable sales in fiscal 2023, fiscal 2022, and fiscal 2021 by approximately 25

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basis points, 45 basis points, and 150 basis points, respectively.

The comparable sales calculation for fiscal 2022 was calculated using sales for a comparable 52-week period.

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.

The average Lowe’s-branded home improvement store has approximately 112,000 square feet of retail selling space.

5 Return on average assets is defined as net earnings divided by average total assets for the last five quarters.

5 Return on invested capital is calculated using a non-GAAP financial measure.

Net earnings to average debt and shareholders’ (deficit)/equity is the most comparable GAAP ratio.

As of February 3, 2023, ROIC was negatively impacted approximately 800 basis points as a result of the sale of the Canadian retail business.

See below for additional information and reconciliations of non-GAAP measures.

Fiscal 2023 Compared to Fiscal 2022

For the purpose of the following discussion, comparable store sales, comparable customer transactions, and comparable average ticket are based upon comparable 52-week periods.

Net Sales – Net sales decreased 11.0% to $86.4 billion in fiscal 2023.

The decrease in total sales was driven by the sale of the Canadian retail business in fiscal 2022, the impact of the 53rd week in fiscal 2022, and a decrease in comparable sales.

Prior year sales included $5.0 billion generated by our Canadian retail business, as well as approximately $1.4 billion due to the 53rd week.

Comparable sales decreased 4.7% over the same period, driven by a 4.6% decline in comparable customer transactions and 0.1% decline in comparable average ticket.

Comparable sales change during each quarter of the fiscal year, as reported, were declines of 4.3% in the first quarter, 1.6% in the second quarter, 7.4% in the third quarter, and 6.2% in the fourth quarter.

During fiscal 2023, we experienced comparable sales increases in two of 14 product categories:

Building Materials and Lawn & Garden.

Strength in Building Materials reflects strong demand from Pro customers while Lawn & Garden benefited from seasonal demand in the first half of the year.

Our DIY customer categories were impacted by lower DIY discretionary demand, particularly in bigger-ticket items, as consumers continue to navigate the macroeconomic environment.

Our lowest comparable sales were in Lumber which were pressured by significant commodity deflation.

Gross Margin – Gross margin as a percentage of sales for fiscal 2023 leveraged 16 basis points compared to fiscal 2022.

The gross margin increase for the year was driven by productivity initiatives and lower transportation costs, partially offset by higher costs associated with the expansion of our supply chain network.

SG&A – SG&A expense for fiscal 2023 leveraged 292 basis points as a percentage of sales compared to fiscal 2022.

This was primarily driven by cycling the long-lived asset impairment, loss on sale, and other closing costs associated with the sale of the Canadian retail business in the prior year, and two favorable legal settlements in the current year, partially offset by fixed cost deleverage due to lower sales.

Depreciation and Amortization – Depreciation and amortization expense deleveraged 17 basis points for fiscal 2023 as a percentage of sales compared to fiscal 2022, primarily due to lower sales.

Interest – Net – Net interest expense is comprised of the following:

(In millions) 2023 2022

Interest expense, net of amount capitalized $ 1,459 $ 1,137

Amortization of original issue discount and loan costs 23 20

Interest on tax uncertainties 1 3

Interest income (101) (37)

Interest – net $ 1,382 $ 1,123

Net interest expense in fiscal 2023 deleveraged 44 basis points primarily due to incremental interest expense related to the issuance of unsecured notes over the past year, partially offset by interest income on our cash equivalents and short-term investments.

Income Tax Provision – Our effective income tax rate was 24.1% in fiscal 2023 compared to 28.8% in fiscal 2022.

The fiscal 2022 rate was unfavorably impacted by the partial deductibility of long-lived asset impairment and loss on sale associated with the sale of the Canadian retail business.

Fiscal 2022 Compared to Fiscal 2021

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended February 3, 2023, and January 28, 2022, see “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition

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and Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended February 3, 2023, filed with the SEC on March 27, 2023.

Non-GAAP Financial Measures

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Adjusted diluted earnings per share is considered a non-GAAP financial measure.

The Company believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company’s core operating performance.

Adjusted diluted earnings per share excludes the impact of a discrete item, further described below, not contemplated in the Company’s business outlook for fiscal 2022.

There were no non-GAAP adjustments in fiscal 2021.

The Company believes this non-GAAP financial measure provides useful insight for analysts and investors in understanding operational performance for fiscal 2023 and fiscal 2022.

Adjusted diluted earnings per share excludes the impact of a certain item, further described below, not contemplated in the Company’s business outlook for fiscal 2023 and fiscal 2022.

Fiscal 2023 Impacts

• In the first quarter of fiscal 2023, the Company recognized pre-tax income of $63 million consisting of a realized gain on the contingent consideration and adjustments to the selling price associated with the fiscal 2022 sale of the Canadian retail business (Canadian retail business transaction).

Fiscal 2022 Impacts

• In the third quarter of fiscal 2022, the Company recognized a pre-tax $2.1 billion long-lived asset impairment of the Canadian retail business.

In the fourth quarter of fiscal 2022, the Company recognized additional pre-tax costs totaling $441 million, consisting of the loss on the sale and other closing costs associated with the sale of the Canadian retail business (Canadian retail business transaction costs).

Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company’s diluted earnings per common share as prepared in accordance with GAAP.

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Pre-Tax Earnings Tax 1

Net Earnings Pre-Tax Earnings Tax 1

Diluted earnings per share, as reported $ 13.20 $ 10.17

Non-GAAP adjustments – per share impacts

Canadian retail business transaction costs 3.95 (0.31) 3.64

Canadian retail business transaction (0.11) — (0.11) 3.95 (0.31) 3.64

Adjusted diluted earnings per share $ 13.09 $ 13.81

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The calculation of ROIC, together with a reconciliation of net earnings to Lease adjusted NOPAT, is as follows:

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(In millions, except percentage data) 2023 2022 2021

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Operating lease interest 157 163 160

Loss on extinguishment of debt — — 1,060

Provision for income taxes 2,449 2,599 2,766

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36.4 % 30.4 % 35.3 %

1 Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 28.8%, 24.7%, and 24.6% for 2022, 2021, and 2020, respectively.

1 Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 24.1%, 28.8%, and 24.7% for fiscal 2023, fiscal 2022, and fiscal 2021, respectively.

2 Average debt and shareholders’ (deficit)/equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total shareholders’ (deficit)/equity.

3 As of February 3, 2023, ROIC was negatively impacted approximately 800 basis points as a result of the sale of the Canadian retail business.

Fiscal 2022 Compared to Fiscal 2021

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

Net Sales – Net sales increased 0.8% to $97.1 billion in 2022.

The increase in total sales was driven by the 53rd week, partially offset by a decrease in comparable sales.

The 53rd week contributed approximately 1.4% to the sales growth for 2022.

Comparable sales decreased 0.9% over the same period, driven by a 7.6% decline in comparable customer transactions, partially offset by a 6.7% increase in comparable average ticket.

Comparable sales change during each quarter of the fiscal year, as reported, were a decline of 4.0% in the first quarter, decline of 0.3% in the second quarter, increase of 2.2% in the third quarter, and decline of 1.5% in the fourth quarter.

During 2022, we experienced comparable sales increases in six of 14 product categories, led by Rough Plumbing, Building Materials, and Paint.

Strength in these categories reflects robust demand from Pro customers, as well as unit price increases

driven by inflation.

We experienced our lowest comparable sales in Seasonal & Outdoor Living, Tools, and Lawn & Garden.

Geographically, three of 15 U.S.

regions experienced positive comparable sales with strength primarily in the south, while our Canadian operations lagged the U.S.

Gross Margin – Gross margin as a percentage of sales for 2022 contracted 7 basis points compared to 2021.

Gross margin was negatively impacted by 30 basis points from higher transportation costs and expansion of our supply chain network and 20 basis points from inventory shrink.

These were partially offset by approximately 25 basis points of favorable product mix and 20 basis points of total rate improvement driven by continued improvement in managing product costs and disciplined pricing strategies.

SG&A – SG&A expense for 2022 deleveraged 193 basis points as a percentage of sales compared to 2021.

This was primarily driven by the long-lived asset impairment, loss on sale, and other closing costs associated with the sale of the Canadian retail business, partially offset by ongoing productivity initiatives.

Depreciation and Amortization – Depreciation and amortization expense deleveraged 9 basis points for 2022 as a percentage of sales compared to 2021, driven by ongoing capital investments in core business investments.

Property, less accumulated depreciation, decreased to $17.6 billion at February 3, 2023, compared to $19.1 billion at January 28, 2022, primarily due to the impairment of the Canadian retail business long-lived assets in the third quarter of 2022.

Interest – Net – Net interest expense is comprised of the following:

(In millions) 2022 2021

Interest expense, net of amount capitalized $ 1,137 $ 869

Amortization of original issue discount and loan costs 20 16

Interest on tax uncertainties 3 12

Interest income (37) (12)

Interest – net $ 1,123 $ 885

Net interest expense in 2022 deleveraged 24 basis points primarily as a result of interest expense related to the issuance of $5.0 billion unsecured notes in March 2022 and $4.8 billion unsecured notes in September 2022.

Income Tax Provision – Our effective income tax rate was 28.8% in 2022 compared to 24.7% in 2021.

The 2022 rate was unfavorably impacted by the partial deductibility of long-lived asset impairment and loss on sale associated with the Canadian retail business.

Fiscal 2021 Compared to Fiscal 2020

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended January 28, 2022, and January 29, 2021, see “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended January 28, 2022, filed with the SEC on March 21, 2022.

3 For fiscal 2022, ROIC was negatively impacted approximately 800 basis points as a result of the sale of the Canadian retail business.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, and return excess cash to shareholders in the form of dividends and share repurchases.

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, return excess cash to shareholders in the form of dividends and share repurchases, and repay debt maturities as they become due.

We believe these sources of liquidity will continue to support our business for the next twelve months.

As of February 3, 2023, we held $1.3 billion of cash and cash equivalents, as well as $3.5 billion in undrawn capacity on our revolving credit facilities.

As of February 2, 2024, we held $921 million of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities.

As of February 2, 2024, our material contractual obligations and commercial commitments consist of leases, long-term debt, purchase obligations, and letters of credit.

See Note 6 , Note 8 , and Note 15 of the Notes to the Consolidated Financial

Statements in Item 8 , “Financial Statements and Supplementary Data”, of this Annual Report for amounts outstanding related to leases, long-term debt, and commitments, respectively, as of February 3, 2023.

See Note 5 , Note 7 , and Note 1 4 of the Notes to the Consolidated Financial Statements in Item 8 , “Financial Statements and Supplementary Data”, of this Annual Report for amounts outstanding related to leases, long-term debt, and commitments, respectively, as of February 2, 2024.

Cash Flows Provided by Operating Activities

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Cash flows from operating activities continued to provide the primary source of our liquidity.

The decrease in net cash provided by operating activities for the year ended February 3, 2023, compared to the year ended January 28, 2022, was due primarily to changes in working capital.

Inventory decreased operating cash flow for fiscal 2022 by approximately $2.6 billion compared to a decrease of $1.4 billion for fiscal 2021.

Accounts payable decreased operating cash flow for fiscal 2022 by $549 million compared to an increase of $466 million in fiscal 2021, driving a reduction of $1.0 billion in operating cash flows for fiscal 2022.

The increase in inventory is primarily due to product cost and freight inflation compared to the prior year, as well as lower inventory turns year-over-year.

The decrease in accounts payable is driven by timing of inventory purchases in the prior year.

Other operating liabilities increased operating cash flows $388 million for fiscal 2022 compared to a decrease of $570 million in fiscal 2021.

This increase is primarily driven by the deferral of payment of our third and fourth quarter estimated federal tax payments under the income tax relief announced by the Internal Revenue Service for business located in states impacted by Hurricane Ian.

The decrease in net cash provided by operating activities for the year ended February 2, 2024, compared to the year ended February 3, 2023, was primarily due to timing of income tax payments and lower net earnings adjusted for non-cash expenses, partially offset by other changes in working capital.

Other operating liabilities decreased operating cash flows $2.1 billion for fiscal 2023.

This decrease is primarily driven by our third and fourth quarter fiscal 2022 estimated federal tax payments that were deferred until the first quarter of fiscal 2023 under the income tax relief announced by the Internal Revenue Service for businesses located in states impacted by Hurricane Ian.

Inventory increased operating cash flow for fiscal 2023 by approximately $1.6 billion compared to a decrease of $2.6 billion in fiscal 2022.

Inventory declined in the current year as we managed inventory replenishment in line with sales trends and improved the timing of the spring product build.

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Cash Flows Used in Investing Activities

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Net cash used in investing activities $ (1,901) $ (1,309)

Net cash used in investing activities primarily consists of transactions related to capital expenditures, offset by proceeds from the sale of the Canadian retail business.

Net cash used in investing activities primarily consists of transactions related to capital expenditures.

Capital expenditures

Our capital expenditures generally consist of investments in our strategic initiatives to enhance our ability to serve customers, improve existing stores, and support expansion plans.

Capital expenditures were $1.8 billion in 2022 and $1.9 billion in 2021.

The following table provides the allocation of capital expenditures for 2022 and 2021:

Existing store investments ¹ 75 % 75 %

Strategic initiatives ² 15 % 15 %

New stores, new corporate facilities and international 3

Total capital expenditures 100 % 100 %

1 Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts.

2 Represents investments related to our strategic focus areas aimed at improving customers’ experience and driving improved performance in the near and long term.

3 Represents expenditures primarily related to land purchases, buildings, and personal property for new store projects and new corporate facilities projects as well as expenditures related to our international operations.

For 2023, our guidance for capital expenditures is up to $2.0 billion.

The following table provides the allocation of our fiscal 2023 capital expenditures guidance:

Existing store investments 70 %

Strategic initiatives 25 %

New stores and corporate facilities 5 %

Capital expenditures were $2.0 billion in fiscal 2023 and $1.8 billion in fiscal 2022.

For fiscal 2024, our guidance for capital expenditures is approximately $2.0 billion.

We may adjust our capital expenditures, if necessary or appropriate, to support our operations, to enhance long-term strategic positioning, or in response to the economic environment.

Cash Flows Used in Financing Activities

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Net cash used in financing activities primarily consist of transactions related to our debt, share repurchases, and cash dividend payments.

In 2022, we issued $9.8 billion of unsecured notes.

This is comprised of $5.0 billion of unsecured notes issued in March 2022 and $4.8 billion of unsecured notes issued in September 2022, the proceeds of which were designated for general corporate purposes.

In 2022, we paid approximately $765 million to retire scheduled debts at maturity.

In fiscal 2023, we issued $3.0 billion of unsecured notes in March 2023, the proceeds of which were designated for general corporate purposes.

Also in fiscal 2023, we paid approximately $500 million due to the scheduled payoff of notes at maturity.

We have a $2.0 billion five-year unsecured revolving third amended and restated credit agreement (the Third Amended and Restated Credit Agreement), with a syndicate of banks, which has a maturity date of December 2026 and an aggregate availability of $2.0 billion.

We also have a $2.0 billion five-year unsecured revolving credit agreement dated March 23, 2020, and as amended, (the 2020 Credit Agreement) with a syndicate of banks, which has a maturity date of December 2026 and an aggregate availability of $2.0 billion.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement (collectively, the Credit Agreements), the Company may increase the combined aggregate availability of the Credit Agreements by an additional $1.0 billion.

We also have a $2.0 billion five-year unsecured revolving amended and restated credit agreement dated September 1, 2023 (the 2023 Credit Agreement), with a syndicate of banks, which has a maturity date of September 2028 and an aggregate availability of $2.0 billion.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Third Amended and Restated Credit Agreement and the 2023 Credit Agreement (collectively, the Credit Agreements), the Company may increase the combined aggregate availability of the Credit Agreements by an additional $1.0 billion.

The Credit Agreements support our commercial paper program.

The amount available to be drawn under the Credit Agreements is reduced by the amount of borrowings under our commercial paper program.

There were no outstanding borrowings under the commercial paper program or Credit Agreements as of February 2, 2024.

Total combined availability under the Credit Agreements as of February 2, 2024, was $4.0 billion.

Outstanding borrowings under the Company’s commercial paper program were $499 million, with a weighted average interest rate of 4.78%, as of February 3, 2023.

There were no outstanding borrowings under the 2020 Credit Agreement or the Third Amended and Restated Credit Agreement as of February 3, 2023.

There were no outstanding borrowings under the commercial paper program, the 2020 Credit Agreement, or the Second Amended and Restated Credit Agreement as of January 28, 2022.

Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of February 3, 2023, was $3.5 billion.

There were no outstanding borrowings under the Credit Agreements as of February 3, 2023.

The Third Amended and Restated Credit Agreement and the 2023 Credit Agreement contain customary representations, warranties, and covenants.

We were in compliance with those covenants as of February 2, 2024.

The following table includes additional information related to our debt for 2022 and 2021:

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The following table includes additional information related to our debt for fiscal 2023 and fiscal 2022:

(In millions, except for interest rate data) 2023 2022

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We also withhold shares from employees to satisfy tax withholding liabilities on share-based payments.

Shares repurchased are returned to

authorized and unissued status.

The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total amount paid for share repurchases for 2022 and 2021:

Shares repurchased are returned to authorized and unissued status.

The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total amount paid for share repurchases for fiscal 2023 and fiscal 2022:

(In millions, except per share data) 2023 2022

Total amount paid for share repurchases 1

$ 6,138 $ 14,124

Total number of shares repurchased 29.2 71.2

Average price paid per share $ 210.07 $ 198.39

1 Excludes unsettled share repurchases and unpaid excise taxes.

As of February 2, 2024, we had $14.6 billion remaining under our share repurchase program with no expiration date.

In the third quarter of 2022, we increased our quarterly dividend payment by 31% to $1.05 per share.

In the third quarter of fiscal 2023, we increased our quarterly dividend payment by 5% to $1.10 per share.

Our dividend payment dates are established such that dividends are paid in the quarter immediately following the quarter in which they are declared.

The following table provides additional information related to our dividend payments for 2022 and 2021:

The following table provides additional information related to our dividend payments for fiscal 2023 and fiscal 2022:

(In millions, except per share data and percentage data) 2023 2022

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The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of March 25, 2024, which is disclosed to provide an enhanced understanding of our sources of liquidity and the effect of our ratings on our cost of funds.

Our debt ratings have enabled, and should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets.

Our debt ratings have enabled, and should continue to enable, us the option to refinance our debt as it becomes due.

Our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

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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.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.

During 2022, our reserve decreased approximately $29 million to $139 million as of February 3, 2023.

During fiscal 2023, our reserve increased approximately $106 million to $245 million as of February 2, 2024.

We also record an inventory reserve for the estimated shrinkage between physical inventories.

This reserve is based primarily on actual shrink results from previous physical inventories.

During 2022, the inventory shrink reserve increased approximately $14 million to $428 million as of February 3, 2023, in response to higher volumes and estimated shrinkage rates based on results from previous physical inventories.

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.

During fiscal 2023, the inventory shrink reserve decreased approximately $3 million to $425 million as of February 2, 2024.

In addition, we receive funds from vendors in the normal course of business, principally as a result of purchase volumes, early payments, or sales-based promotions of vendors’ products.

Generally, these vendor funds do not represent the reimbursement of specific, incremental, and identifiable costs that we incurred to sell the vendor’s product.

Many of the vendor funds associated with these purchases are earned under agreements that are negotiated on an annual basis or shorter.

The majority of the vendor funds associated with these purchases are earned under agreements that are negotiated on an annual basis or shorter.

The funds are recorded as a reduction to the cost of inventory as they are earned.

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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.

We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term in excess of our established reserves, 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 obsolete inventory and assumptions about net realizable value.

We also apply judgment in the determination of obsolete inventory and assumptions about net realizable value.

For vendor funds, we develop accrual rates based on the provisions of the agreements in place.

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However, it is possible that actual results could differ from recorded reserves.

A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would each have affected net earnings by approximately $10 million for 2022.

A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrink reserve would have affected net earnings by approximately $32 million for 2022.

A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrink reserve would have affected net earnings by approximately $32 million for fiscal 2023.

We have not made any material changes in the methodology used to recognize vendor funds during the past three fiscal years.

If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory.

However, substantially all receivables associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year.

However, substantially all receivables

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associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year.

Adjustments to gross margin and inventory in the following fiscal year have historically not been material.

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We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s assets may not be recoverable.

For operating locations, our primary indicator that assets may not be recoverable is

consistently negative cash flow for a twelve month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.

For operating locations, our primary indicator that assets may not be recoverable is consistently negative cash flow for a twelve-month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results.

Management also monitors other factors when evaluating operating locations for impairment, including individual locations’ execution of their operating plans and local market conditions, including incursion, which is the opening of either other Lowe’s locations or those of a direct competitor within the same market.

We also consider there to be a triggering event when there is a current expectation that it is more likely than not that a given location will be closed or otherwise disposed of significantly before the end of its previously estimated useful life.

During the third quarter of 2022, the Company determined it was more likely than not that the assets within the Canadian retail business would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives and were evaluated for recoverability.

During the third quarter of fiscal 2022, the Company determined it was more likely than not that the assets within the Canadian retail business would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives and were evaluated for recoverability.

Based on the proposed transaction, the Company reconsidered the appropriate asset grouping of long-lived assets attributable to the Company’s Canadian locations given the change in the Company’s expectations regarding use and disposition of its associated assets.

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The carrying value of an operating location’s asset group includes inventory, property, operating and finance lease right-of-use assets and operating liabilities including accounts payables, accrued compensation, and operating lease liabilities.

Financial and nonoperating liabilities are excluded from the carrying value of the asset group.

Financial and non-operating liabilities are excluded from the carrying value of the asset group.

When determining the stream of projected future cash flows associated with an individual operating location, management makes assumptions, incorporating local market conditions about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and operating expense, as well as asset residual values or lease rates.

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A market approach of an orderly transaction under current market conditions was used in determining the estimated fair value of the Canada asset group, which was based on the proposed transaction price, inclusive of performance-based contingent consideration.

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Judgments and uncertainties involved in the estimate

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Effect if actual results differ from assumptions

During fiscal 2022, the Company recorded $2.1 billion of long-lived asset impairment within selling, general and administrative expenses (SG&A) in the consolidated statements of earnings, which reflects the full carrying value of the long-lived assets of the Canada asset group.

During fiscal 2023, long-lived asset impairment was immaterial.

If the actual results are not consistent

with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary from our estimated impairment losses.

During fiscal 2022, the Company recorded $2.1 billion of long-lived asset impairment within selling, general and administrative expenses (SG&A) in the consolidated statements of earnings, which reflected the full carrying value of the long-lived assets of the Canada asset group.

If the actual results are not consistent with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary from our estimated impairment losses.

In the event that our estimates vary from actual results, we may record additional impairment losses, which could be material to our results of operations.

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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 2022, our self-insurance liabilities decreased approximately $45 million to $1.1 billion as of February 3, 2023.

During fiscal 2023, our self-insurance liabilities increased approximately $34 million to $1.1 billion as of February 2, 2024.

Judgments and uncertainties involved in the estimate

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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 $80 million for 2022.

A 100 basis point change in our discount rate would have affected net earnings by approximately $21 million for 2022.

A 10% change in our self-insurance liability would have affected net earnings by approximately $83 million for fiscal 2023.

A 100 basis point change in our discount rate would have affected net earnings by approximately $20 million for fiscal 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis