This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and nine months endedOctober 28, 2022 , andOctober 29, 2021 . This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year endedJanuary 28, 2022 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Unless otherwise specified, all comparisons made are to the corresponding period of 2021. 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
Net sales in the third quarter of 2022 increased 2.4% to$23.5 billion compared to net sales of$22.9 billion in the third quarter of 2021. The increase in total sales was driven by an increase in comparable sales. Net earnings in the third quarter of 2022 were$154 million compared to net earnings of$1.9 billion in the third quarter of 2022. Diluted earnings per common share were$0.25 in the third quarter of 2022 compared to$2.73 in the third quarter of 2021. Included in the third quarter of 2022 results is$2.1 billion of pre-tax long-lived asset impairment associated with the Canadian retail business, discussed further below, which decreased diluted earnings per share by$3.02 . Excluding the impact of this item, adjusted diluted earnings per common share increased 19.8% to$3.27 in the third quarter of 2022 (see discussion of
non-GAAP financial measures beginning on page 18).
For the first nine months of 2022, cash flows from operating activities were approximately$8.1 billion , while$1.1 billion was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, we repurchased$4.0 billion of common stock and paid$666 million in dividends during the three months endedOctober 28, 2022 . During the third quarter of 2022, comparable sales increased 2.2% with nine of 15 product categories generating positive comparable sales. We continued to experience broad-based demand from our Pro customers, which reflects the success of our Pro initiatives. In addition to our momentum with the Pro customer, we experienced improved Do-It-Yourself (DIY) customer performance during the quarter driven by project-related demand. Our positive comparable sales also reflect our disciplined pricing strategies to offset cost inflation. While improving our operational productivity, we continue to invest in our hourly front-line associates. In the third quarter we awarded$200 million in bonuses, which are expected to be paid out before the holiday season, and announced an incremental investment of$170 million in permanent wage increases effectiveDecember 2022 . In addition, during the quarter, we converted four geographic regions to our market-based delivery model for big and bulky product which improves the customer experience through expanded fulfillment options. We now have eight regions converted to the new model, which cover more than half of our stores, and we are on track to complete the roll-out by the end of next year. OnNovember 3, 2022 , we announced that we entered into a definitive agreement to sell our Canadian retail business, which is expected to close in early calendar 2023. Although we have made progress in improving the Canadian retail business over the past few years, the performance has continued to lag ourU.S. business operations. By executing this transaction, we will focus on further enhancing our operating margin, simplify our business model, and deliver sustainable value to our shareholders. OPERATIONS The following table sets forth the percentage relationship to net sales of each line item of the consolidated statements of earnings (unaudited), as well as the percentage change in dollar amounts from the prior period. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited). 16 [[Image Removed: low-20221028_g2.jpg]]
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Table of ContentsBasis Point Increase/(Decrease) in Percentage
Increase/(Decrease)
Percentage of Net Sales in Dollar Amounts from Prior Three Months Ended from Prior Period Period October 28, 2022 October 29, 2021 2022 vs. 2021 2022 vs. 2021 Net sales 100.00 % 100.00 % N/A 2.4 % Gross margin 33.30 33.10 20 3.0 Expenses: Selling, general and administrative 27.45 19.08 837 47.4 Depreciation and amortization 1.92 1.85 7 6.1 Operating income 3.93 12.17 (824) (66.9) Interest - net 1.25 0.97 28 31.7 Pre-tax earnings 2.68 11.20 (852) (75.5) Income tax provision 2.02 2.93 (91) (29.1) Net earnings 0.66 % 8.27 % (761) (91.9) % Basis Point Increase/(Decrease) in Percentage
Increase/(Decrease)
Percentage of Net Sales in Dollar Amounts from Prior Nine Months Ended from Prior Period Period October 28, 2022 October 29, 2021 2022 vs. 2021 2022 vs. 2021 Net sales 100.00 % 100.00 % N/A (0.4) % Gross margin 33.51 33.41 10 (0.1) Expenses: Selling, general and administrative 20.38 18.10 228
12.1
Depreciation and amortization 1.80 1.64 16 9.7 Operating income 11.33 13.67 (234) (17.5) Interest - net 1.07 0.86 21 23.3 Pre-tax earnings 10.26 12.81 (255) (20.2) Income tax provision 2.92 3.15 (23) (7.8) Net earnings 7.34 % 9.66 % (232) (24.3) %
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 (unaudited), including the related notes to the consolidated financial statements (unaudited).
During the three months endedJuly 29, 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 10 basis points for the nine months endedOctober 28, 2022 . The comparable sales metric for the three months endedOctober 28, 2022 , and the three and nine months endedOctober 29, 2021 was not impacted or adjusted by similar outages. [[Image Removed: low-20221028_g2.jpg]] 17
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Table of Contents Three Months Ended Nine Months Ended Other MetricsOctober 28, 2022
2.2 % 2.2 % (0.8) % 7.4 % Total customer transactions (in millions) 225 237 719 785 Average ticket 2 $ 104.54$ 96.54 $ 103.76 $ 95.40 At end of period: Number of stores 1,969 1,973 Sales floor square feet (in millions) 208
208
Average store size selling square feet (in thousands) 3 106
105
Net earnings to average debt and shareholders'
(deficit)/equity 4 24.4 % 27.5 % Return on invested capital 4 27.6 % 30.1 % 1 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 decide to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Comparable sales are presented on a transacted basis when tender is accepted from a customer. Comparable sales include online sales, which impacted third quarter fiscal 2022 and fiscal 2021 comparable sales by approximately 80 basis points and 175 basis points, respectively, and year-to-date fiscal 2022 and fiscal 2021 comparable sales by approximately 45 basis points and 170 basis points, respectively. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week and 39-week periods.
2 Average ticket is defined as net sales divided by the total number of customer transactions.
3 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 averageLowe's -branded home improvement store has approximately 112,000 square feet of retail selling space. 4 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 ofOctober 28, 2022 , return on invested capital was negatively impacted 590 basis points as a result of the long-lived asset impairment associated with the Canadian retail business. See below for additional information and reconciliations of non-GAAP measures.
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 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. Fiscal 2022 Impacts •In the third quarter of fiscal 2022, the Company recognized a pre-tax$2.1 billion long-lived asset impairment of the Canadian retail business (Canadian retail business transaction costs). Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company's diluted earnings per common share as prepared in accordance with GAAP. The Company's methods of determining non-GAAP financial measures may differ from the method used by other companies and may not be comparable.
The following provides a reconciliation of the Company's non-GAAP financial measure to the most directly comparable GAAP financial measure: 18 [[Image Removed: low-20221028_g2.jpg]]
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Table of Contents Three Months Ended October 28, 2022 Pre-Tax Earnings Tax1 Net Earnings Diluted earnings per share, as reported$ 0.25 Non-GAAP adjustments - per share impacts Canadian retail business transaction costs 3.32 (0.30) 3.02 Adjusted diluted earnings per share
1 Represents the corresponding tax benefit or expense related to the item excluded from adjusted diluted earnings per share.
Return on
Return onInvested 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: For the Periods Ended (In millions, except percentage data) October 28, 2022 October 29, 2021 Calculation of Return onInvested Capital Numerator Net Earnings $ 6,686 $ 8,213 Plus: Interest expense - net 1,037 854 Operating lease interest 160 162 Provision for income taxes 2,581 2,700 Lease adjusted net operating profit 10,464 11,929
Less:
Income tax adjustment 1 2,915 2,952 Lease adjusted net operating profit after tax $
7,549 $ 8,977
Denominator
Average debt and shareholders' (deficit)/equity 2$ 27,355 $ 29,836 Net earnings to average debt and shareholders' (deficit)/equity 24.4 % 27.5 % Return on invested capital 3 27.6 % 30.1 %
1 Income tax adjustment is defined as lease adjusted net operating profit
multiplied by the effective tax rate, which was 27.9% and 24.7% for the periods
ended
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 ofOctober 28, 2022 , return on invested capital was negatively impacted 590 basis points as a result of the long-lived asset impairment associated with the Canadian retail business. Results of OperationsNet Sales - Net sales in the third quarter of 2022 increased 2.4% to$23.5 billion . The increase in total sales was primarily driven by a comparable sales increase. Comparable sales increased 2.2% over the same period, driven by a 8.0% increase in comparable average ticket, partially offset by a 5.8% decline in comparable customer transactions. [[Image Removed: low-20221028_g2.jpg]] 19
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During the third quarter of 2022, we experienced comparable sales increases in nine of 15 product categories, led byBuilding Materials , Rough Plumbing, and Lumber. Strength in these categories reflects broad-based demand from both the Pro customer and DIY customer, as well as unit price increases due to cost inflation. We experienced the lowest comparable sales in Lighting, Décor, and Seasonal & Outdoor Living in the quarter. Geographically, 12 of 15 U.S. regions experienced positive comparable sales, while our Canadian operations lagged theU.S. Net sales decreased 0.4% to$74.6 billion for the first nine months of 2022 compared to 2021. Comparable sales declined 0.8% over the same period, driven by a 8.1% decline in comparable customer transactions, partially offset by a 7.3% increase in comparable average ticket. Gross Margin - For the third quarter of 2022, gross margin as a percentage of sales increased 20 basis points. The gross margin increase for the quarter is driven by approximately 110 basis points of total rate improvement primarily in Lumber as we cycle significant deflation pressure in the prior year. The favorable rate improvement was partially offset by 35 basis points of deleverage from inventory shrink and 30 basis points of deleverage from higher transportation costs and expansion of our supply chain network. Gross margin as a percentage of sales increased 10 basis points in the first nine months of 2022 compared to 2021. Gross margin was positively impacted by approximately 35 basis points of total rate improvement due to continued improvements in managing product costs and disciplined pricing strategies and 20 basis points of favorable product mix. These favorable impacts are partially offset by approximately 25 basis points of distribution costs and 20 basis points of deleverage from inventory shrink.
SG&A - For the third quarter of 2022, SG&A expense deleveraged 837 basis points as a percentage of sales compared to the third quarter of 2021. This was primarily driven by the long-lived asset impairment related to our Canadian retail business. This was partially offset by ongoing productivity initiatives.
SG&A expense as a percentage of sales deleveraged 228 basis points as a percentage of sales for the first nine months of 2022 compared to 2021 primarily due to the same factors that impacted SG&A for the third quarter.
Depreciation and Amortization - Depreciation and amortization deleveraged seven basis points as a percentage of sales for the third quarter of 2022 compared to 2021 due primarily to ongoing capital expenditures in core business investments. Depreciation and amortization deleveraged 16 basis points as a percentage of sales for the first nine months of 2022 compared to 2021 primarily due to the same factors that impacted depreciation and amortization for the third quarter. Interest - Net - Interest expense for the third quarter of 2022 deleveraged 28 basis points primarily due to interest expense related to the issuance of unsecured notes inMarch 2022 andSeptember 2022 , partially offset by scheduled payoff of notes at maturity. Interest expense for the first nine months of 2022 deleveraged 21 basis points primarily due to the same factors that impacted interest expense for the third quarter. Income Tax Provision - Our effective income tax rates were 75.5% and 26.1% for the three months endedOctober 28, 2022 andOctober 29, 2021 , respectively, and 28.4% and 24.6% for the nine months endedOctober 28, 2022 andOctober 29, 2021 , respectively. The unfavorable tax rate for the three and nine months endedOctober 28, 2022 compared to 2021 is largely driven by an increase in the valuation allowance for deferred taxes related to the long-lived asset impairment associated with RONA inc.
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. We believe these sources of liquidity will continue to support our business for the next twelve months. As ofOctober 28, 2022 , we held$3.2 billion of cash and cash equivalents, as well as$4.0 billion in undrawn capacity on our revolving credit facilities.
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Table of Contents Cash Flows Provided by Operating Activities Nine Months
Ended
(In millions)October 28, 2022
Net cash provided by operating activities $ 8,138 $ 9,179 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 nine months endedOctober 28, 2022 , compared to the nine months endedOctober 29, 2021 , was driven primarily by changes in working capital. Inventory decreased operating cash flows for the first nine months of 2022 by approximately$2.3 billion compared to a decrease of approximately$446 million for the first nine months of 2021, while accounts payable increased operating cash flows by$921 million for the first nine months of 2022, compared to an increase of$436 million for the first nine months of 2021. The increase in inventory and accounts payable is primarily due to product cost and freight inflation compared to the prior year, as well as lower inventory turns year-over-year. Deferred revenue decreased operating cash flows by$117 million for the first nine months of 2022, compared to an increase of$444 million for the first nine months of 2021. The decline in operating cash flow due to deferred revenue compared to the prior year is primarily due to an operational focus on customer fulfillment. Other operating liabilities also increased operating cash flows by$205 million during the first nine months of 2022, compared to a decrease of$421 million for the first nine months of 2021. This increase is primarily driven by the deferral of payment of our third quarter estimated federal tax payment under the income tax relief announced by the Internal Revenue Service for businesses located in states impacted by Hurricane Ian.
Cash Flows Used in Investing Activities
Nine Months Ended (In millions)October 28, 2022
Net cash used in investing activities $ (1,115) $ (1,360)
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. The following table provides our capital
expenditures for the nine months ended
Nine Months Ended (In millions) October 28, 2022 October 29, 2021 Core business investments 1 $ 826 $ 973 Strategic initiatives 2 171 181 New stores, new corporate facilities and international 3 93 102 Total capital expenditures $ 1,090 $ 1,256
1Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts.
2Represents investments related to our strategic focus areas aimed at improving customers' experience and driving improved performance in the near and long term (excluding acquisitions). 3Represents 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. Our fiscal year 2022 outlook for capital expenditures is up to$2.0 billion . [[Image Removed: low-20221028_g2.jpg]] 21
-------------------------------------------------------------------------------- Table of Contents Cash Flows Used in Financing Activities Nine Months Ended (In millions)October 28, 2022
Net cash used in financing activities $ (4,932) $ (6,391)
Net cash used in financing activities primarily consists of transactions related to our share repurchases, long-term debt, and cash dividend payments.
Total Debt
During the nine months ended
Our commercial paper program is supported by the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement. The amount available to be drawn under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the Company's commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as ofOctober 28, 2022 , andOctober 29, 2021 . Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as ofOctober 28, 2022 was$4.0 billion .
The 2020 Credit Agreement and the Third Amended and Restated Credit Agreement
contain customary representations, warranties, and covenants. We were in
compliance with those covenants at
The following table includes additional information related to our debt for the
nine months ended
Nine Months Ended (In millions) October 28, 2022 October 29, 2021 Net proceeds from issuance of debt $ 9,667$ 4,972 Repayment of debt (831) (595) Maximum commercial paper outstanding at any period 2,470 400 Short-term borrowings outstanding at quarter-end - 1,000 Weighted-average interest rate of short-term borrowings outstanding - % 0.79 % 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. Shares repurchased are retired and 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 cash used to repurchase shares for the nine months endedOctober 28, 2022 , andOctober 29, 2021 : Nine Months Ended
(In millions, except per share data)
Total amount paid for share repurchases $ 12,127 $ 8,999 Total number of shares repurchased 61.2 46.6 Average price paid per share $ 198.12 $ 193.16
As of
Dividends
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Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from$2.00 per share for the nine months endedOctober 29, 2021 , to$2.65 per share for the nine months endedOctober 28, 2022 . Capital Resources We expect to continue to have access to the capital markets on both a short-term and long-term basis 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 byStandard & Poor's (S&P) and Moody's as ofNovember 23, 2022 , which we are disclosing to enhance 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 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 Senior Debt 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. In addition, we do not believe it will be necessary to repatriate significant cash and cash equivalents and short-term investments held in foreign affiliates to fund domestic operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. Our significant and critical accounting policies and estimates have not changed significantly since the filing of the Annual Report.
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. During the three months endedOctober 28, 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 totalCanada 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 theCanada asset group includes 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 is excluded from the carrying value of theCanada 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, and a market approach to determine the fair value of our individual locations identified for sale or closure. A market approach of an orderly transaction under current market conditions was used in determining the estimated fair value of theCanada asset group, which was based on the proposed transaction price, inclusive of deferred consideration. [[Image Removed: low-20221028_g2.jpg]] 23
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Judgments and uncertainties involved in the estimate
Our impairment evaluations require us to apply judgment in determining whether an event or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, including the evaluation of whether it is more likely than not 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, and estimated selling prices or lease rates for locations identified for closure.
Effect if actual results differ from assumptions
During the three months ended
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