LOWES COMPANIES INC 10-K

Item 7 - 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 two-year period ended February 2, 2024 (our fiscal years 2023 and 2022). 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. This discussion should be read in conjunction with our 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 four sections: • Executive Overview • Operations • Financial Condition, Liquidity and Capital Resources • Critical Accounting Policies and Estimates EXECUTIVE OVERVIEW The following table highlights our annual financial results: (in millions, except per share data) 2023 2022 1 2021 Net sales $ 86,377 $ 97,059 $ 96,250 Net earnings 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 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. 23 Table of Content s 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. OPERATIONS 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 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 Net sales 100.00 % 100.00 % 100.00 % Gross margin 33.39 33.23 33.30 16 (7) Expenses: Selling, general and administrative 18.02 20.94 19.01 (292) 193 Depreciation and amortization 1.99 1.82 1.73 17 9 Operating income 13.38 10.47 12.56 291 (209) Interest – net 1.60 1.16 0.92 44 24 Pre-tax earnings 11.78 9.31 11.64 247 (233) Income tax provision 2.83 2.68 2.87 15 (19) Net earnings 8.95 % 6.63 % 8.77 % 232 (214) The following table sets forth key metrics utilized by management in assessing business performance. 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. Other Metrics 2023 2022 1 2021 Comparable sales (decrease)/increase 2 (4.7) % (0.9) % 6.9 % Total customer transactions (in millions) 835 937 1,002 Average ticket 3 $ 103.51 $ 103.64 $ 96.09 At end of year: Number of stores 1,746 1,738 1,971 Sales floor square feet (in millions) 195 195 208 Average store size selling square feet (in thousands) 4 112 112 106 Net earnings to average debt and shareholders’ (deficit)/equity 31.6 % 26.6 % 32.3 % Return on invested capital 5 36.4 % 30.4 % 35.3 % 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 A comparable location is defined as a retail location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable in the month of its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. A location we have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Operating locations which are sold are included in comparable sales until the date of sale. Comparable sales include online sales, which positively impacted comparable sales in fiscal 2023, fiscal 2022, and fiscal 2021 by approximately 25 24 Table of Content s 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. 5 Return on invested capital is calculated using a non-GAAP financial measure. 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 25 Table of Content s 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 Adjusted Diluted Earnings Per Share 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 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). 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. The Company’s methods of determining this non-GAAP financial measure may differ from the method used by other companies and may not be comparable. 2023 2022 Pre-Tax Earnings Tax 1 Net Earnings Pre-Tax Earnings Tax 1 Net Earnings Diluted earnings per share, as reported $ 13.20 $ 10.17 Non-GAAP adjustments – per share impacts Canadian retail business transaction (0.11) — (0.11) 3.95 (0.31) 3.64 Adjusted diluted earnings per share $ 13.09 $ 13.81 1 Represents the corresponding tax benefit or expense specifically related to the item excluded from adjusted diluted earnings per share. Return on Invested Capital Return on Invested Capital (ROIC) is calculated using a non-GAAP financial measure. Management believes ROIC is a meaningful metric for analysts and investors as a measure of how effectively the Company is using capital to generate financial returns. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management may differ from the methods used by other companies. We encourage you to understand the methods used by another company to calculate ROIC before comparing its ROIC to ours. We define ROIC as the rolling 12 months’ lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and shareholders’ (deficit)/equity. Lease adjusted NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure. The calculation of ROIC, together with a reconciliation of net earnings to Lease adjusted NOPAT, is as follows: 26 Table of Content s (In millions, except percentage data) 2023 2022 2021 Calculation of Return on Invested Capital Numerator Net earnings $ 7,726 $ 6,437 $ 8,442 Plus: Interest expense – net 1,382 1,123 885 Operating lease interest 157 163 160 Provision for income taxes 2,449 2,599 2,766 Lease adjusted net operating profit 11,714 10,322 12,253 Less: Income tax adjustment 1 2,819 2,970 3,024 Lease adjusted net operating profit after tax $ 8,895 $ 7,352 $ 9,229 Denominator Average debt and shareholders’ (deficit)/equity 2 $ 24,418 $ 24,155 $ 26,109 Net earnings to average debt and shareholders’ (deficit)/equity 31.6 % 26.6 % 32.3 % Return on invested capital 3 36.4 % 30.4 % 35.3 % 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 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, 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 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 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 (In millions) 2023 2022 Net cash provided by operating activities $ 8,140 $ 8,589 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 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. 27 Table of Content s Cash Flows Used in Investing Activities (In millions) 2023 2022 Net cash used in investing activities $ (1,901) $ (1,309) 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 $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 (In millions) 2023 2022 Net cash used in financing activities $ (6,666) $ (7,049) Net cash used in financing activities primarily consist of transactions related to our debt, share repurchases, and cash dividend payments. Total Debt 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 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 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. 28 Table of Content s 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 Net proceeds from issuance of debt $ 2,983 $ 9,667 Repayment of debt $ (601) $ (867) Net change in commercial paper $ (499) $ 499 Maximum commercial paper outstanding at any period $ 2,195 $ 2,470 Short-term borrowings outstanding at year-end $ — $ 499 Weighted-average interest rate of short-term borrowings outstanding — % 4.78 % Share Repurchases We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions. 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 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. Dividends 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 fiscal 2023 and fiscal 2022: (In millions, except per share data and percentage data) 2023 2022 Total cash dividend payments $ 2,531 $ 2,370 Dividends paid per share $ 4.30 $ 3.70 Dividend payout ratio 33 % 37 % Capital Resources We expect to continue to have access to the capital markets on both short-term and long-term bases when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of 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 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. Debt Ratings S&P Moody’s Commercial Paper A-2 P-2 Senior Debt BBB+ Baa1 Outlook Stable Stable 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. 29 Table of Content s 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 included herein. 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 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 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. 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. As the related inventory is sold, the amounts are recorded as a reduction to cost of sales. Funds that are determined to be reimbursements of specific, incremental, and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense. 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 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 obsolete 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 diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate and confirm actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met. Effect if actual results differ from assumptions We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for obsolete inventory or inventory shrinkage during the past three fiscal years. We believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. However, it is possible that actual results could differ from recorded reserves. A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would each have affected net earnings by approximately $18 million for fiscal 2023. 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 30 Table of Content s associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year. Adjustments to gross margin and inventory in the following fiscal year have historically not been material. Long-Lived Asset Impairment Description We review the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. When evaluating long-lived assets for impairment, our asset group is generally at an individual location level, as that is the lowest level for which cash flows are identifiable. Cash flows for individual locations do not include an allocation of corporate overhead. We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s 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. 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 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. The Company determined the total Canada retail business (Canada asset group) to be the appropriate asset group for which Canadian business assets should be evaluated, as this represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Changes in asset group determinations are accounted for on a prospective basis. A potential impairment has occurred if the fair value of the asset group is less than the asset group’s carrying value. 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 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. Operating lease payments are included in the projected future cash flows. Financing lease payments are excluded from the projected future cash flows. An impairment loss is recognized when the carrying amount of the operating location is not recoverable and exceeds its fair value. The carrying value of the Canada asset group included substantially all assets and liabilities of the Canadian retail business, including accounts receivable, inventory, property, operating and finance lease right-of-use assets, definite-lived intangible assets, operating liabilities including accounts payable and accrued compensation, and operating and finance lease liabilities. The cumulative foreign currency translation adjustment balance was excluded from the carrying value of the Canada asset group in evaluating the recoverability of a held and used asset group. We use an income approach to determine the fair value of our individual operating locations, which requires discounting projected future cash flows. This involves making assumptions regarding both a location’s future cash flows, as described above, and an appropriate discount rate to determine the present value of those future cash flows. We discount our cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. The selected market participants represent a group of other retailers with a market footprint similar in size to ours. We use a market approach to determine the fair value of our individual locations identified for sale or closure. This involves making assumptions regarding the estimated selling prices or estimated lease rates by obtaining information from property brokers or appraisers in the specific markets being evaluated. The information includes comparable sales of similar assets and assumptions about demand in the market for purchase or lease of these assets. 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. 31 Table of Content s Judgments and uncertainties involved in the estimate Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed or an asset will be otherwise disposed of significantly before the end of its previously estimated useful life. Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin, and controllable expenses, assumptions about market performance for operating locations, and estimated selling prices or lease rates for locations identified for closure. We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate for fair values determined using an income approach. Effect if actual results differ from assumptions During fiscal 2023, long-lived asset impairment was immaterial. 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. Self-Insurance Description We are self-insured for certain losses relating to workers’ compensation, automobile, general and product liability, extended protection plans, and certain medical and dental claims. We have excess insurance coverage above certain retention amounts to limit exposure from single events and earnings volatility. Our self-insured retention or deductible, as applicable, is limited to $2 million per occurrence involving workers’ compensation, $10 million per occurrence involving general liability, product liability, and automobile liability. We do not have any excess insurance coverage for self-insured extended protection plan or 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 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 These estimates are subject to changes in the regulatory environment, utilized discount rate, projected exposures including payroll, sales and vehicle units, as well as the frequency, lag and severity of claims. Effect if actual results differ from assumptions We have not made any material changes in the methodology used to establish our self-insurance liability during the past three fiscal years. Although we believe that we have the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our self-insurance liability would have affected net earnings by approximately $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.