LOWES COMPANIES INC (LOW)

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 January 31, 2025 (our fiscal years 2024 and 2023). Unless otherwise noted, all references herein for the years 2024, 2023, and 2022 represent the fiscal years ended January 31, 2025, February 2, 2024, and February 3, 2023, respectively.  Fiscal years 2024 and 2023 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:

1    The fiscal year ended February 3, 2023 had 53 weeks. The fiscal years ended January 31, 2025 and February 2, 2024 had 52 weeks.

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

Net sales for fiscal 2024 decreased 3.1% from fiscal 2023 to $83.7 billion. Comparable sales for fiscal 2024 decreased 2.7%, consisting of a 3.0% decrease in comparable customer transactions, and a 0.3% increase in comparable average ticket. Net earnings for fiscal 2024 decreased 10.0% to $7.0 billion. Diluted earnings per common share decreased 7.4% in fiscal 2024 to $12.23 from $13.20 in fiscal 2023. Included in fiscal 2024 results is pre-tax income of $177 million associated with the fiscal 2022 sale of the Canadian retail business, which increased diluted earnings per share by $0.24. Included in the fiscal 2023 results is $63 million of pre-tax income associated with the sale of the Canadian retail business, which increased diluted earnings per share by $0.11 in fiscal year 2023. Adjusting for these items, adjusted diluted earnings per common share decreased 8.4% to $11.99 in 2024 from adjusted diluted earnings per common share of $13.09 in 2023 (see the non-GAAP financial measures discussion).

For fiscal 2024, cash flows from operating activities were $9.6 billion, with $1.9 billion used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $3.9 billion of common stock and paid $2.6 billion in dividends during the year.

Macroeconomic factors, such as ongoing inflation and higher interest rates resulting in depressed levels of housing turnover, continued to exert downward pressure on big-ticket DIY discretionary spending in fiscal 2024. Despite these factors, we generated positive Pro customer comparable sales and increased Pro penetration for the year. This is the result of our cumulative investments in the right brands and products, greater inventory depth, improved job site delivery, dedicated service levels, and the Pro customer digital experience. In addition, our strong online performance gives us confidence that our focus on an intuitive user experience and omnichannel fulfillment capabilities, specifically more same-day delivery options and an improved Buy Online Pickup in Store experience, are resonating with our customers.

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Looking Forward

The core demand drivers of our business that we track remain unchanged: disposable personal income, home price appreciation, and the age of the housing stock. We believe these drivers will sustain long-term demand as homeowners invest in repairs and upgrades. Trends such as millennial household formation, the elderly preference to age in place, and the persistence of remote work also support home improvement market demand. While these demand drivers remain supportive, broader market uncertainties also exist around tariffs, tax policy, and the overall geopolitical environment. We remain focused on delivering strong operating performance, while continuing to make the right long-term investments for growth. This includes executing at a high level through the near-term market pressures by driving productivity, managing costs, and investing in our updated Total Home strategy while continuing to drive sustainable, 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.

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.

1    The fiscal year ended February 3, 2023 had 53 weeks. The fiscal years ended January 31, 2025 and February 2, 2024 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 2024, fiscal 2023, and fiscal 2022 by approximately 50

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basis points, 25 basis points, and 45 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 2024 Compared to Fiscal 2023

Net Sales – Net sales decreased 3.1% to $83.7 billion in fiscal 2024. The decrease in total sales was primarily driven by the decrease in comparable sales. Comparable sales decreased 2.7% over the same period, driven by a 3.0% decline in comparable customer transactions, and a 0.3% increase in comparable average ticket. Comparable sales change during each quarter of the fiscal year, as reported, were declines of 4.1% in the first quarter, 5.1% in the second quarter, 1.1% in the third quarter, and an increase of 0.2% in the fourth quarter.

During fiscal 2024, we had comparable sales increases in Building Materials. An additional four product categories performed above the Company average, including Hardware, Rough Plumbing, Appliances, and Millwork. Strength in Building Materials reflects strong demand from Pro customers. Our DIY customer categories were impacted by lower DIY discretionary demand, particularly in bigger-ticket interior projects.

Gross Margin – Gross margin as a percentage of sales for fiscal 2024 decreased seven basis points compared to fiscal 2023. The gross margin decrease for the year was primarily driven by investments in our supply chain, partially offset by productivity initiatives.

SG&A – SG&A expense for fiscal 2024 deleveraged 72 basis points as a percentage of sales compared to fiscal 2023. This was primarily driven by employee compensation and benefits, due to higher bonus attainment and employee insurance costs, as well as cycling favorable legal settlements in the prior year.

Depreciation and Amortization – Depreciation and amortization expense deleveraged eight basis points for fiscal 2024 as a percentage of sales compared to fiscal 2023.

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

Net interest expense in fiscal 2024 leveraged three basis points.

Income Tax Provision – Our effective income tax rate was 24.0% in fiscal 2024 compared to 24.1% in fiscal 2023.

Fiscal 2023 Compared to Fiscal 2022

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended February 2, 2024, and February 3, 2023, 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 February 2, 2024, filed with the SEC on March 25, 2024.

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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 the comparison of operational performance for fiscal 2024 and fiscal 2023. Adjusted diluted earnings per share excludes the impact of certain items, further described below, not contemplated in the Company’s business outlook for fiscal 2024 and fiscal 2023.

Fiscal 2024 Impacts

•In fiscal 2024, the Company recognized pre-tax income of $177 million consisting of realized gains on the contingent consideration associated with the fiscal 2022 sale of the Canadian retail business (Canadian retail business transaction).

Fiscal 2023 Impacts

•In 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).

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.

1 Represents the tax benefit or expense 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. 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:

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1    Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 24.0%, 24.1%, and 28.8% for fiscal 2024, fiscal 2023, and fiscal 2022, respectively.

2    Average debt and shareholders’ deficit 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.

3 For the year ended January 31, 2025, February 2, 2024, and February 3, 2023, return on invested capital was impacted by approximately 44 basis points, 19 basis points, and -800 basis points, respectively, 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 January 31, 2025, we held $1.8 billion of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities.

As of January 31, 2025, 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 14 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 January 31, 2025.

Cash Flows Provided by Operating Activities

Cash flows from operating activities continued to provide the primary source of our liquidity.  The increase in net cash provided by operating activities for the year ended January 31, 2025, compared to the year ended February 2, 2024, was primarily due to timing of income tax payments and other changes in working capital, partially offset by lower net earnings. Cash flows relating to changes in other operating liabilities improved $2.1 billion due primarily to timing of federal estimated tax payments. Fiscal 2023 includes payment of certain fiscal 2022 estimated tax payments deferred under the income tax relief announced by the Internal Revenue Service (IRS) for businesses located in states impacted by Hurricane Ian. In addition, fiscal 2024 benefited from deferral of certain federal estimated tax payments that were deferred until fiscal 2025 under the income tax relief announced by the IRS for businesses impacted by Hurricane Helene.

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Cash Flows Used in Investing Activities

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 $1.9 billion in fiscal 2024 and $2.0 billion in fiscal 2023.

For fiscal 2025, our guidance for capital expenditures is approximately $2.5 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

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

Total Debt

In fiscal 2024, we repaid a $450 million senior note at maturity.

In fiscal 2023, we issued $3.0 billion of unsecured notes in March 2023, and during fiscal 2023, we also repaid a $500 million senior note 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 January 31, 2025. Total combined availability under the Credit Agreements as of January 31, 2025, was $4.0 billion. There were no outstanding borrowings under the Company’s commercial paper program as of February 2, 2024, and there were no outstanding borrowings under the Credit Agreements as of February 2, 2024.

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 January 31, 2025.

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The following table includes additional information related to our debt for fiscal 2024 and fiscal 2023:

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 2024 and fiscal 2023:

1    Excludes unsettled share repurchases and unpaid excise taxes.

As of January 31, 2025, we had $10.8 billion remaining under our share repurchase program with no expiration date.

Dividends

In the third quarter of fiscal 2024, we increased our quarterly dividend payment by 5% to $1.15 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 2024 and fiscal 2023:

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 24, 2025, 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.

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

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 inventory reserve for the estimated adjustment to mark down merchandise inventory to the lower of cost or net realizable value (LCNRV). This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.  During fiscal 2024, our reserve decreased approximately $23 million to $222 million as of January 31, 2025.

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 2024, the inventory shrink reserve increased approximately $2 million to $427 million as of January 31, 2025.

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 markdown 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 inventory 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 inventory subject to markdown or the weighted average estimated loss rate used in the calculation of our LCNRV inventory reserve would each have affected net earnings by approximately $17 million for fiscal 2024. 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 2024.

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

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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.

Self-Insurance

Description

We are self-insured for certain losses relating to workers’ compensation, automobile, property, 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, and $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 2024, our self-insurance liabilities decreased approximately $138 million to $966 million as of January 31, 2025.

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 $72 million for fiscal 2024. A 100 basis point change in our discount rate would have affected net earnings by approximately $18 million for fiscal 2024.

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:

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.

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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.

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.

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.

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

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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.

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:

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

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.

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:

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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 14 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

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.

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Cash Flows Used in Investing Activities

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

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.

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

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:

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:

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.

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

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

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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.

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.

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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.

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 3, 2023 (our fiscal years 2022 and 2021). 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. 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

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. 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).

For fiscal 2022, cash flows from operating activities were $8.6 billion, with $1.8 billion used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $14.1 billion of common stock and paid $2.4 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 ProgramTM, 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

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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.

OPERATIONS

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

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.

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.

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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.

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 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.

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.

6    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.

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 for fiscal 2022. There were no non-GAAP adjustments in fiscal 2021.

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. 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.

1 Represents the corresponding tax benefit or expense specifically related to the item excluded from adjusted diluted earnings per share.

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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:

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.

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

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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:

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.

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 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 3, 2023, 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

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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.

Cash Flows Provided by Operating Activities

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.

Cash Flows Used in Investing Activities

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.

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:

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.

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.

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:

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Cash Flows Used in Financing Activities

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

Total Debt

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.

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.

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. 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.

The Third Amended and Restated Credit Agreement and the 2020 Credit Agreement contain customary representations, warranties, and covenants. We were in compliance with those covenants as of February 3, 2023.

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

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

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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:

As of February 3, 2023, we had $20.7 billion remaining under our share repurchase program with no expiration date.

Dividends

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

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 27, 2023, 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 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.

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.

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.

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

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.  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 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, 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.

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 $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.

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.  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

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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. 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 nonoperating 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.

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 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 2021, long-lived asset impairment was immaterial. If the actual results are not consistent

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

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 $80 million for 2022. A 100 basis point change in our discount rate would have affected net earnings by approximately $21 million for 2022.

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 January 28, 2022 (our fiscal years 2021 and 2020).  Unless otherwise noted, all references herein for the years 2021, 2020, and 2019 represent the fiscal years ended January 28, 2022, January 29, 2021, and January 31, 2020, respectively.  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

Performance Overview

Net sales for fiscal 2021 increased 7.4% over fiscal year 2020 to $96.3 billion. The increase in total sales was primarily driven by comparable sales growth. Comparable sales increased 6.9% over fiscal year 2020, driven by an 11.1% increase in comparable average ticket, partially offset by a 4.2% decrease in comparable customer transactions. Net earnings for fiscal 2021 increased 44.7% to $8.4 billion. Diluted earnings per common share increased 55.3% in fiscal year 2021 to $12.04 from $7.75 in 2020. Included in the fiscal 2020 results are a $1.1 billion pre-tax loss on extinguishment of debt from cash tender offers to purchase and retire an aggregate principal amount of $3.0 billion in outstanding notes, as well as operating costs related to the Canada restructuring actions. Adjusting for these items, diluted earnings per common share increased 35.9% to $12.04 in 2021 from adjusted diluted earnings per common share of $8.86 in 2020 (see the non-GAAP financial measures discussion).

For 2021, cash flows from operating activities were $10.1 billion, with $1.9 billion used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $13.1 billion of common stock and paid $2.0 billion in dividends during the year.

In 2021, we experienced comparable sales increases in eleven of fifteen product categories and all fifteen U.S. regions. Our Total Home strategy continues to gain momentum as we provide a one-stop solution for both DIY and Pro customers. Throughout fiscal 2021, we maintained focus on the Pro customer with improved in-stock inventory levels and store layout, enhanced service offerings, and expanded brand and product offerings that meet their project needs. We enhanced the customer online shopping experience with improved search and navigation functionality and expanded on-trend inventory assortments. Our private brand product assortment has also elevated our performance with the DIY customer, especially in Home Décor. In addition, we have expanded our omnichannel fulfillment capabilities. During 2021, we converted three geographic areas to our market-based delivery model for big and bulky product. In this new model, product flows directly to customer homes from our distribution network, bypassing stores altogether. As part of our fulfillment capabilities, our customers can also now track appliance deliveries in real time and we continue to expand our same-day and next-day fulfillment options.

In the stores, our disciplined focus on driving operating leverage through our Perpetual Productivity Improvement (PPI) initiatives resulted in operational process improvements that reduced the amount of time our associates spend on tasking activities and can instead focus on serving our customers. As part of these initiatives, we recently launched a new store inventory management system that provides associates real-time visibility to inventory in their store and reduces non-productive hours spent looking for product. In addition, we expanded our simplified user interface introduced earlier in the year across the sales floor which accelerates the associate training process and allows associates to focus on customer service while reducing customer wait times.

Looking Forward

As part of our continued efforts around our Total Home strategy, we are focused on further enhancing our omnichannel capabilities in 2022 across three key areas: expanding our online assortment, enhancing the user experience, and improving

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fulfillment. We will continue to expand our Lowes.com assortment to meet our customers’ design and lifestyle needs, while at the same time, enhancing the user experience with upgrades to the visualization and configuration tools we offer online. As we head into spring, we have leveraged our expanded supply chain network to position our in-stock inventory for our heavy selling season.

While there is uncertainty in the economy with rising interest rates and inflation, our outlook for the home improvement industry remains robust, and we believe we are well-positioned to accelerate our market share gains through our Total Home strategy.

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OPERATIONS

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

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.

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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 have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Comparable sales include online sales, which positively impacted the comparable sales increase in fiscal 2021, fiscal 2020, and fiscal 2019 by approximately 150 basis points, 565 basis points, and 25 basis points, respectively.

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

4    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. 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 a non-GAAP financial measure. Management believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company’s core financial performance. Adjusted diluted earnings per share excludes the impact of discrete items, further described below, not contemplated in the Company’s business outlook for fiscal 2020. Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rate for the period. There were no non-GAAP adjustments in fiscal 2021.

Fiscal 2020 Impacts

•In the third quarter of fiscal 2020, the Company recognized a $1.1 billion loss on extinguishment of debt in connection with the cash tender offers on an aggregate principal amount of $3.0 billion in outstanding notes (Loss on extinguishment of debt).

•Beginning in the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and in the fourth quarter of fiscal 2019, the Company announced additional actions to improve future performance and profitability of its Canadian operations. As a result of this review and related actions, the Company recognized pre-tax operating costs of $45 million related to inventory write-downs and other closing costs in fiscal 2020 (Canada restructuring).

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.

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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 profits. 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:

1    Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 24.7%, 24.6%, and 23.9% for 2021, 2020, and 2019, 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.

Fiscal 2021 Compared to Fiscal 2020

Net Sales – Net sales increased 7.4% to $96.3 billion in 2021. The increase in total sales was driven by comparable sales growth. Comparable sales increased 6.9% over the same period, driven by an 11.1% increase in comparable average ticket, partially offset by a 4.2% decline in comparable customer transactions. Comparable sales change during each quarter of the

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fiscal year, as reported, were an increase of 25.9% in the first quarter, decline of 1.7% in the second quarter, increase of 2.2% in the third quarter, and increase of 5.0% in the fourth quarter.

During 2021, we experienced comparable sales increases in eleven of fifteen product categories, led by Electrical, Lumber, and Flooring. We delivered strong comparable sales in Electrical and Lumber due to strong unit demand from Pro customers, as well as unit price increases driven by inflation. New product offerings drove strong sales in Flooring, led by Vinyl Flooring. We experienced lower comparable sales in Paint, Hardware, and Lighting due to cycling prior year DIY demand at the onset of the COVID-19 pandemic. Geographically, all fifteen U.S. regions and Canada experienced positive comparable sales.

Gross Margin – Gross margin as a percentage of sales for 2021 increased 29 basis points compared to 2020. Gross margin was positively impacted by approximately 65 basis points of total rate improvement driven by continued improvement in managing product costs and disciplined pricing strategies, as well as approximately 25 basis points of leverage from higher credit revenue. These benefits were partially offset by 35 basis points of deleverage due to product mix and 30 basis points of deleverage from supply chain costs.

SG&A – SG&A expense for 2021 leveraged 167 basis points as a percentage of sales compared to 2020. This was primarily driven by 115 basis points of leverage due to lower COVID-19 related expenses, including additional compensation to hourly front-line associates, emergency paid leave, and cleaning costs; 45 basis points of leverage in retail operating salaries due to increased sales and improved operating efficiencies as a result of our PPI initiatives; and 30 basis points of leverage due to costs associated with the reset of the layout of our U.S. stores in the prior year. These benefits were partially offset by 20 basis points of deleverage due to the fourth quarter discretionary bonus to front-line associates.

Depreciation and Amortization – Depreciation and amortization expense deleveraged 17 basis points for 2021 as a percentage of sales compared to 2020, driven by ongoing capital investments in store environment, store equipment, and technology projects. Property, less accumulated depreciation, decreased to $19.1 billion at January 28, 2022, compared to $19.2 billion at January 29, 2021.

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

Net interest expense in 2021 leveraged three basis points primarily as a result of increased sales in the current year, offset by interest expense related to the issuance of $2.0 billion unsecured notes in March 2021 and $2.0 billion unsecured notes in September 2021.

Loss on Extinguishment of Debt – During the third quarter of 2020, we repurchased and retired $3.0 billion aggregate principal amount of our outstanding debt resulting in a loss on extinguishment of debt of $1.1 billion.

Income Tax Provision – Our effective income tax rate was 24.7% in 2021 compared to 24.6% in 2020.

Fiscal 2020 Compared to Fiscal 2019

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended January 29, 2021 and January 31, 2020, 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 29, 2021, filed with the SEC on March 22, 2021.

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations supplemented with our short-term and long-term borrowings, remain sufficient to fund our operations while allowing us to make strategic investments to support long-term growth and return excess cash to shareholders in the form of dividends and share repurchases. As of January 28, 2022, we held $1.1 billion of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities. We believe these sources of liquidity and our continued access to the capital markets on both a short-term and long-term basis, as needed, are adequate to fund our operations and investments to grow our business, repay our debt as it becomes due, pay dividends, and fund our share repurchases over the next twelve months.

As of January 28, 2022, 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 January 28, 2022.

Cash Flows Provided by Operating Activities

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 January 28, 2022, versus the year ended January 29, 2021, was due primarily to changes in working capital, partially offset by higher net earnings. Accounts payable increased for fiscal 2021 by $466 million compared to an increase of $3.2 billion in fiscal 2020, driving a reduction of $2.7 billion in operating cash flows for fiscal 2021. Inventory decreased operating cash flow for fiscal 2021 by approximately $1.4 billion compared to a decrease of $3.0 billion for fiscal 2020. The increase in accounts payable and inventory in the prior year was driven by a ramp up in inventory purchase volume to meet sustained customer demand at the beginning of the COVID-19 pandemic. In the current year, we have continued to experience sustained demand levels and maintained a higher level of inventory and related accounts payable. Other operating liabilities decreased $570 million for fiscal 2021 compared to an increase of $813 million in fiscal 2020. The decrease in other operating liabilities in the current year compared to the prior year is primarily driven by COVID-related accrued discretionary compensation for hourly associates in the prior year and timing of tax payments.

Cash Flows Used in Investing Activities

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

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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 $1.9 billion in 2021 and $1.8 billion in 2020. The following table provides the allocation of capital expenditures for 2021 and 2020:

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.

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.

For 2022, our capital expenditures forecast is approximately $2.0 billion. The following table provides the allocation of our fiscal 2022 capital expenditures forecast:

Cash Flows Used in Financing Activities

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

Total Debt

In 2021, we issued $4.0 billion of unsecured notes. This is comprised of $2.0 billion of unsecured notes issued in March 2021 and $2.0 billion of unsecured notes issued in September 2021, the proceeds of which were designated for general corporate purposes. In April 2021, we also entered into a $1.0 billion unsecured 364-day term loan facility (the 2021 Term Loan), which was repaid during fiscal 2021. In 2021, we also paid approximately $1.0 billion to retire scheduled debts at maturity.

In December 2021, we entered into 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. The Third Amended and Restated Credit Agreement amends and restates the Company’s amended and restated credit agreement, dated September 10, 2018 (the Second Amended and Restated Credit Agreement), to among other things (i) extend the maturity date of the revolving credit facility to December 2026 and (ii) increase the aggregate availability to a total of $2.0 billion.

Also in December 2021, we amended the five-year unsecured revolving credit agreement dated March 23, 2020 (the 2020 Credit Agreement) with a syndicate of banks. The amendment, among other things, increased the availability of the unsecured revolving credit agreement to $2.0 billion, maturing in March 2025. 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, the Company may increase the combined aggregate availability of both agreements by an additional $1.0 billion.

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The Third Amended and Restated Credit Agreement and the 2020 Credit Agreement (collectively, 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 Company’s commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as of January 28, 2022. 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 29, 2021. Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of January 28, 2022, was $4.0 billion.

The Third Amended and Restated Credit Agreement and the 2020 Credit Agreement contain customary representations, warranties, and covenants. We were in compliance with those covenants at January 28, 2022.

Our ratio of debt to capital (shareholder’s (deficit)/equity plus debt) was 124.2% and 93.8% as of January 28, 2022 and January 29, 2021, respectively.

The following table includes additional information related to our debt for 2021 and 2020:

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 2021 and 2020:

As of January 28, 2022, we had $19.7 billion remaining under our share repurchase program with no expiration date. For 2022, we expect to repurchase shares totaling approximately $12.0 billion, subject to market conditions.

Dividends

In the third quarter of 2021, we increased our quarterly dividend payment by 33% to $0.80 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 2021 and 2020:

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

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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 21, 2022, 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 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.

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

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 2021, our reserve decreased approximately $14 million to $168 million as of January 28, 2022.

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 2021, the inventory shrink reserve increased approximately $49 million to $414 million as of January 28, 2022, 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.  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 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, 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.

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

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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 have affected net earnings by approximately $13 million for 2021. A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrink reserve would have affected net earnings by approximately $31 million for 2021.

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.  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 locations whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable.  When evaluating locations for impairment, our asset group is 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.

A potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the location’s assets are less than the carrying amount of the assets. The carrying value of a location’s asset group includes inventory, property, operating and finance lease right-of-use assets and operating liabilities including inventory payables, salaries payable and operating lease liabilities. Financial and nonoperating 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.

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 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.

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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 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 years 2021 and 2020, long-lived asset impairment recorded within selling, general and administrative expenses in the consolidated statements of earnings was immaterial. We have not made any material changes in the methodology used to estimate the future cash flows of operating locations or locations identified for closure during the past three fiscal years. 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 or product liability, and $10 million per occurrence involving automobile. 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 2021, our self-insurance liabilities increased approximately $23 million to $1.1 billion as of January 28, 2022.

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 $84 million for 2021. A 100 basis point change in our discount rate would have affected net earnings by approximately $23 million for 2021.