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Article by DailyStocks_admin    (05-14-08 07:36 AM)

Warren Buffett Stock Topic for LOW. Berkshire Hathaway owns 7,000,000 shares. As of Dec 31,2007, this represents 0.23 percent of portfolio.


General Information

Lowe’s Companies, Inc. and subsidiaries (the Company) is a Fortune 50 company and the world’s second largest home improvement retailer, with specific emphasis on retail do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers who utilize our installation services, and Commercial Business Customers. We offer a complete line of products and services for home decorating, maintenance, repair, remodeling, and property maintenance. As of February 1, 2008, we operated 1,534 stores in 50 states and Canada, with 174 million square feet of retail selling space.

Incorporated in North Carolina in 1952, Lowe’s Companies, Inc. has been publicly held since 1961. Our common stock is listed on the New York Stock Exchange - ticker symbol “LOW.”

See Item 6, “Selected Financial Data,” for historical revenues, profits and identifiable assets.

Who We Serve

We serve homeowners, renters and Commercial Business Customers. Homeowners and renters primarily consist of do-it-yourselfers, those taking advantage of our installed sales programs, and others buying for personal and family use. Commercial Business Customers include repair and remodeling contractors, electricians, landscapers, painters, plumbers, and commercial and residential property maintenance professionals, among others.

To meet customers’ varying needs, we combine merchandise sales and service in categories that are relevant to them. We offer a full array of home improvement products in the following categories: appliances, lumber, flooring, paint, millwork, fashion plumbing, building materials, lighting, tools, lawn & landscape products, hardware, seasonal living, cabinets & countertops, home style & organization, rough plumbing, outdoor power equipment, nursery, rough electrical and home environment.

Our Market

Based on the most recent comprehensive data available, which is from 2006, we estimate the size of the U.S. home improvement market to be approximately $755 billion annually, comprised of $585 billion of product demand and $170 billion of installed labor opportunity. Data from a variety of primary and secondary sources, including trade associations, government publications, industry participants and other sources was analyzed as the basis for our estimate. This data captures a wide range of categories relevant to our business, including major appliances and garden supplies.

As we continue to monitor economic data and the home improvement marketplace, there are many variables that impact consumer demand for the products and services we offer. Key indicators we monitor include housing turnover, home ownership levels, real disposable personal income and employment. We also monitor demographic and societal trends that are indicators of home improvement industry growth. Currently, all of these indicators suggest continued weakness in consumer demand.


Housing turnover, which peaked in calendar year 2005, continues to slow according to The National Association of Realtors®. Recent data suggests that 2008 will remain challenging for housing turnover.


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


Although real disposable personal income continues to grow, it is projected to grow at a slower pace this year than last. Real disposable personal income growth is forecasted to be 2.1% for calendar 2008 compared with 3.1% for calendar 2007, as supported by data from the March 2008 Blue Chip Economic Indicators™.


Employment is an indicator of home improvement sales. The forecasted average unemployment rate of 5.3% for 2008 from the March 2008 Blue Chip Economic Indicators™ is higher than the 4.6% average seen in both 2006 and 2007 and suggests that Americans will face relatively less favorable employment prospects this year.

The home improvement retailing business includes many competitors. We compete with a number of traditional hardware, plumbing, electrical and home supply retailers, as well as other chains of warehouse home improvement stores and lumberyards in most of our trade areas. In addition, we compete, with respect to some of our products, with general merchandise stores, mail order firms, warehouse clubs and online retailers. The principal competitive factors are customer service, location, price, product and brand selection, and name recognition.

Our Stores

New Store Expansion
Our expansion strategy led to the opening of 153 stores in fiscal 2007 (149 new and four relocated) that included two primary prototypes: a 117,000-square-foot (117K) store for large markets and a 94,000-square-foot (94K) store to serve smaller markets. As we continue our expansion and strive to maximize our return on investment, we consider market demographics and land availability, among other factors, to determine the appropriate prototype for a particular market. In fiscal 2008, our growth will be comprised of 94K, 103,000-square-foot and 117K stores to meet the specific needs of each market.

International Expansion
In June 2005, we announced expansion plans into Canada. Based on information obtained through a thorough market assessment, we are adapting our U.S. business model to best meet the unique needs and attributes of the Canadian market. We opened six stores in Canada in fiscal 2007, which are our first stores outside the U.S., and will continue our Canadian expansion in 2008.

In January 2007, we announced expansion plans into Mexico. We expect to open our first stores in Monterrey in fiscal 2009.

Investments in Existing Stores
During fiscal 2007, we continued our long history of investing in our existing stores to enhance the shopping experience for our retail and Commercial Business Customers. This included relamping our stores at regular intervals to ensure they remained bright, adding new displays, improving point-of-sale and directional signage, adding more product selection, repainting our building exteriors, and re-striping our parking lots. We categorize our merchandising-related investments in our stores as resets or remerchandising.

Resets are necessary to drive comparable store sales and keep our stores fresh with new and innovative products. These resets involve the replacement of a particular product or vendor, and generally do not require major changes in the store. We conducted hundreds of resets in fiscal 2007.

In fiscal 2007, we completed the remerchandising of 116 of our earlier format stores to make them more closely resemble our most current store prototypes. These remerchandising efforts focused on moving entire departments, improving adjacencies and enhancing the shopability within the appliances, cabinets & countertops, flooring, fashion plumbing, paint, lighting, home style & organization, lumber and building materials departments. In addition, we replaced or refurbished all of our selling centers, including the returns and customer service areas of these stores. All new interior graphics, signage, and way-finding materials were also added to increase shopability and brighten the atmosphere. Finally, self check-out was installed in all 116 of our remerchandised stores. We continuously make these investments to maintain our best-in-class stores. These enhancements enable our stores to continue to offer customers the shopping experience and environment they deserve, and also deliver stronger sales.

Serving Our Customers

Our vision is to be our customers’ first choice for home improvement. To achieve this vision, we continue to focus on excellent customer service, Everyday Low Prices, and innovative operational, merchandising, marketing and distribution strategies. We believe customers’ perceptions of the quality of service determine a retailer’s success or failure. Therefore, we are always looking for ways to improve our level of service, optimize store labor and drive in-store process improvement, build our talent pool, and enhance our sales culture. The following are several key initiatives we believe will continue to support our growth and success going forward.

Everyday Low Prices
Our customers do not have to wait for a sale to find a great value. We offer low prices every day. Our promise to customers is that if they find a lower everyday or advertised price on an identical stock product at a local competitor, we will not just match that price, but we will beat it by 10%.

Specialty Sales
We recognize the opportunity that our Specialty Sales initiatives represent and the importance of these businesses to our long-term growth. Our Specialty Sales initiatives include three major categories: Installed Sales, Special Order Sales and Commercial Business Customer sales, internally referred to as the “Big 3.” In addition, our effort to utilize e-Commerce to drive sales and conveniently provide product information to customers is managed by our Specialty Sales group.

Installed Sales
We offer installation services in over 40 categories with flooring, millwork and cabinets & countertops generating the highest sales. Our Installed Sales model, which includes the separation of selling and administrative tasks, allows our sales associates to shift their focus to project selling, while project managers ensure that the details related to an installation job are efficiently executed. Installed Sales, which includes both product and labor, has proven to be a successful service initiative accounting for approximately 6% of total sales in fiscal 2007. We also continue to refine our offerings, including an ongoing test of an in-home selling model for certain Installed Sales categories.

Special Order Sales
Our Special Order Sales product offerings provide our customers the opportunity to select a wider assortment of product options beyond the approximately 40,000 we carry in our stores. We are making the Special Order Sales process easier for customers by providing more product displays and electronic product catalogs in our stores, as well as on Lowes.com. We continue to enhance integrated design tools and ordering systems storewide in order for customers to envision projects, as well as to efficiently receive quotations and complete an order.

Special Order kiosks, whether electronic or literature-based, are available in various departments throughout the store for facilitating special orders in addition to what is made available on Lowes.com. These kiosks facilitate the ability of customers to view product pictures, and special order hundreds of thousands of products.

Our Special Order Express initiative is intended to allow for faster and more efficient delivery of Special Order products to customers, while at the same time manage our inventory investment. Under this approach, certain items that do not have enough individual store demand to be economically stocked in all stores, but have sizeable demand across a group of stores, will be kept on hand in our distribution centers. This allows for fast shipment to our stores, or in some cases, direct shipment to a customer’s home. Our Special Order Express initiative allows us to balance quickly satisfying customers’ needs with a desire to minimize our inventory investment. We will continue to refine and enhance this initiative in fiscal 2008.

Commercial Business Customers
Growth in total sales to Commercial Business Customers outpaced the Company average in fiscal 2007. Our focus is to continue offering exceptional service to repair/remodel, residential property management, and business maintenance customers. Because we understand that time is money for these businesses, we continue to focus on ways to tailor our product and service offerings for these customers to quickly find what they need, when they need it.

In order to enable Commercial Business Customers to quickly access the products they need, our stores are merchandised with high-volume, take-with product appropriate for the season. We continue to evaluate and expand our contractor packs, which are economical quantities of the items Commercial Business Customers use most. In addition, Commercial Business Customers can phone or fax their orders in advance or order online for pickup the same day or the next day, depending on the time of day the order is placed. For added convenience, we deliver to job sites seven days a week in most areas. We want to be a valued business partner to Commercial Business Customers, so we ensure our LowesForPros.com site features up-to-date articles, job estimators and business forms, e-newsletters, statistics and other vital information that Commercial Business Customers can use for their business.

Our multi-channel capabilities enable customers to buy at the store or online. Lowes.com is an information destination for customers around the world and allows customers to buy online and ship anywhere in the U.S. Our site facilitates customers researching, comparing and buying Lowe’s products and services whenever and from wherever they desire. We offer how-to and buying guides online to help customers make smarter, more informed buying decisions and to empower them in their home improvement projects. We also offer customers the ability to check product availability at their local store and our direct-ship facilities, and offer store pick-up and hassle-free returns regardless of where the product was purchased. As more and more people are using the internet to research the products they want, we continue to add content to our site and enhance our merchandise selection to meet their needs.

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

We also offer proprietary credit programs for Commercial Business Customers. They include a Lowe’s Business Account, which is ideal for small- to medium-size businesses and offers minimum monthly payments, and Lowe’s Accounts Receivable, which is ideal for medium- to large-size businesses that pay in full each month.

See Item 8, “Financial Statements and Supplementary Data,” for a description of our credit programs.

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

Our Products

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

In addition to offering a wide selection of national brand name merchandise, we are committed to building long-term value for Lowe’s through the development of exclusive, proprietary brands where we focus on delivering the best quality, the best value and recognizably differentiated products to meet our customers’ needs and wants.

National Brand Name Merchandise
In many product categories, customers look for a brand they know and trust to instill confidence in their purchase. A typical Lowe's home improvement store stocks approximately 40,000 items, with hundreds of thousands of items available through our Special Order Sales system. Each store carries a wide selection of national brand name merchandise such as KitchenAid®, Samsung, Whirlpool®, Pella®, Werner®, Kohler®, DeWalt®, John Deere, Troy-Bilt®, Jenn-Air®, Bosch®, Valspar®, Owens Corning® and many more. Our merchandise selection provides the DIY, DIFM and Commercial Business Customer a one-stop shop for products needed to complete home improvement, repair, maintenance or construction projects. See page 42 of Lowe’s 2007 Annual Report to Shareholders for the table summarizing sales by product category for each of the last three fiscal years.

Proprietary Brands
To further differentiate our offering, we carry many brands that are exclusive to Lowe’s. These unique brands cover several categories like lighting, flooring, home style & organization, tools and more, and give our customers great quality and value. Exclusive brand names such as Premier Living™, Kobalt®, Portfolio®, Harbor Breeze®, Reliabilt®, Perfect Flame™, Top-Choice® Lumber and Utilitech™ are found only at Lowe’s.

Distribution Network
To efficiently move product from our vendors to our stores and maintain in-stock levels, we own and operate 13 highly-automated regional distribution centers (RDCs). The RDCs are strategically located in North Carolina (2), Georgia, Indiana, Pennsylvania, Texas, California, Ohio, Florida, Connecticut, Wyoming, Illinois and Oregon. On average, each RDC serves 118 stores. We expect to open an additional RDC in Pittston, Pennsylvania in fiscal 2008. We also lease a third-party distribution facility to serve our Canadian stores.

We operate 14 flatbed distribution centers (FDCs) to distribute merchandise that requires special handling due to size or type of packaging such as lumber, boards, panel products, irrigation pipe, vinyl sidings, ladders and building materials. We own 12 and lease two of these FDCs. We expect to open an additional FDC in Purvis, Mississippi in fiscal 2008.

We also operate four facilities to support our import business, Special Order Sales and internet fulfillment. We own two and lease two of these facilities. In addition, we utilize three third-party transload facilities. These facilities do not hold inventory, but are the first point of receipt for imported products. The transload facilities sort and allocate products to RDCs based on individual store demand and forecasts.

On average in fiscal 2007, over 72% of the stock merchandise we purchased was shipped through our distribution network, while the remaining portion was shipped directly to stores from our vendors.

Building Our Brand

Customers want Lowe’s to serve as a resource for products and projects to help them maintain and enhance their homes and communities. Our Marketing and Advertising programs, communicated via television, radio, newspaper, magazine, direct mail, sponsorships, internet and in-store programs, all play a critical role in cultivating this emotional and rational connection with the consumer. Through an extensive understanding of our customers and their needs and expectations, we deliver a message that will develop loyal customer relationships and differentiate Lowe’s from other home improvement sources.

Media Investment
A combination of national broadcast and cable television, supplemented by an array of national magazines and internet banner advertising, provides the platform for building brand awareness. We complement the national media investment in key markets by local television and radio schedules. Newspaper circulars and ROP (Run of Press) serve as the primary communication vehicle for retail messaging, and regularly feature Lowe’s breadth of product selection, customer services and Everyday Low Price positioning. Major promotional events receive network radio support with a local radio overlay in key markets. We promote internet access to Lowe’s retail advertising through the use of online banner advertising. The Lowe’s brand has also been successfully integrated into television programming, including the Oprah Winfrey show, Rate My Space on HGTV and Indoors Out on the DIY network.

Direct to Consumer Marketing
We continue to refine programs to respond to the changing needs and lifestyles of consumers. Through innovative database technology, we create direct mail campaigns based on precise criteria such as purchase activity, affinity group subscription(s), household demographics, regional weather patterns and even consumers who are preparing to move, are in the process of moving or have recently moved into a new home (“New Movers”). Despite the housing slow-down, New Movers continue to spend considerably more on their previous and new homes than the average homeowner. This behavior has helped guide the decision to further invest in this particular consumer base over the course of the next several years. As a result, Lowe’s has finalized a two-year agreement with the United States Postal Service’s change of address program and will add this to its multi-dimensional portfolio of direct mail tactics that speak to the highly engaged New Movers. Additionally, opt-in e-mail programs line up with Lowe’s affinity and education programs: Lowe’s Creative Ideas for Home and Garden ®, Lowe’s Creative Ideas for Outdoor Living ™ and Lowe’s Creative Ideas for Woodworkers ™. Membership in the Team Lowe’s Racing Fan Club and participation in the Build-n-Grow children’s clinics creates another level of engagement with our consumers both inside Lowe’s stores and beyond our walls. Each of these varying acquisition and retention programs creates loyal Lowe’s customers.

Multicultural Marketing
Lowe’s reaches its diverse communities and customer base in various manners, including multicultural marketing and outreach to Hispanic, African-American and Asian customers. For these cultural groups, Lowe’s executes advertising across many media, including television, radio and print, in both English and native languages. Some of the unique efforts include La Cancha Lowe’s, Lowe’s Hispanic mobile marketing program providing fun to families at key soccer events across the country; Lowe’s sponsorship of the CIAA’s annual Basketball Tournament, the nation’s oldest black athletic conference consisting of ten historically African-American institutions of higher education, that has blossomed into one of largest collegiate post-season tournaments in the country; and Lowe’s new Chinese, Korean, and Vietnamese language websites offering a new way for many Asian consumers to learn more about home improvement.

Team Lowe’s Racing
As one of the world’s fastest growing sports, NASCAR is an important part of building our brand. We are the proud sponsor of Jimmie Johnson, back-to-back NASCAR Sprint® Cup Series champion, the #48 car and Lowe’s Motor Speedway. We also host hospitality events at various sites throughout the racing season, leveraging and further building membership in the Team Lowe’s Racing Fan Club. In 2007, we continued to foster our relationship with Adrian Fernandez, who drove in the NASCAR Busch® Series race in Mexico City for Lowe’s. In addition, we teamed up with Adrian Fernandez and Fernandez Racing to field the #15 car in the American Le Mans Series.

Reaching Out

We believe community involvement extends beyond the boundaries of our stores. Following are some examples of how we are partnering with respected organizations to make a difference in our communities: Habitat for Humanity
Lowe’s is a partner with Habitat for Humanity International, helping provide safe, affordable housing for thousands of working families. Lowe’s contributed more than $4 million to Habitat projects in 2007, and Lowe’s employee volunteers gave hands-on support at home sites coast-to-coast to help Habitat families build their dreams.

Lowe’s also underwrites Habitat for Humanity’s Women Build program, empowering women volunteer teams to construct Habitat homes. The volunteers in this program built more than 90 homes in 2007.

American Red Cross
As a national disaster relief partner with the American Red Cross, Lowe’s made it easier for Red Cross chapters to respond to disasters such as fires, floods and tornadoes with much-needed supplies from local stores. We also worked side-by-side with the American Red Cross at hurricane fairs along the Gulf and East coasts. In 2007, Lowe’s contributed more than $500,000 to the American Red Cross, including customer and employee donations.

The Home Safety Council
Founded by Lowe’s in 1993, The Home Safety Council is a nonprofit organization with a vision of creating safer American homes. Thanks to a $3 million contribution in 2007 from the Lowe’s Charitable and Educational Foundation, The Home Safety Council helped reach thousands of children and families with vital safety information.

Lowe’s Charitable and Educational Foundation
Founded in 1957, the Lowe's Charitable and Educational Foundation (LCEF) has a long and proud history of contributing to grassroots community projects. LCEF’s primary philanthropic focus areas include community and public school improvement projects, safe and affordable housing, and education scholarships. LCEF provides funding only to 501(c)(3) organizations. In 2007, LCEF awarded more than $19 million in grants. Two specific initiatives of LCEF during 2007 were SkillsUSA and Rebuilding Together.

In 2007, Lowe’s took steps through LCEF to address the country’s growing skilled worker shortage and “skills gap” by contributing $500,000 to SkillsUSA programs nationwide. Thirty grants in 21 states received the first SkillsUSA/Lowe’s $10,000 education grants supporting education program enhancements and community service projects. Fifty-eight schools received CareerSafe vouchers, demonstrating Lowe’s corporate commitment to job site safety. Lowe’s has increased our commitment to SkillsUSA with a pledge of $1 million for 2008.

Lowe’s lives up to its tagline, “Let’s Build Something Together,” every day. In 2007, LCEF launched a partnership with Rebuilding Together, the nation’s largest all-volunteer home rehabilitation organization. Grants ranging from $15,000 to $20,000 kicked off rehabilitation projects in Long Island, N.Y., Orange County, Calif., and Broward County, Fla., and LCEF pledged another $1 million in grants to Rebuilding Together affiliates. Between fall 2007 and spring 2008, that $1 million was slated to finance at least 100 projects.

Lowe’s Heroes
Lowe’s Heroes employee volunteers tackle local problems in their communities. In 2007, Lowe’s stores worked with representatives from nonprofit organizations and concerned individuals from their communities to help improve schools, build Habitat for Humanity homes or address safety issues—making their communities better places to live.

Lowe’s Employee Relief Fund
Lowe’s Employee Relief Fund is dedicated to distributing emergency funds to our employees who face financial hardships due to natural disasters, house fires or illness. The Company matches employee donations to the Fund. Since 1999, Lowe’s Employee Relief Fund has assisted more than 5,300 employees with more than $6 million in funds.

Information Systems

We are continuously assessing and upgrading our information systems in an effort to support growth, augment new sales initiatives, control costs and enable better decision-making. During the last several years, we have made substantial investments in developing and purchasing new computer systems.

We have a point-of-sale system, electronic bar code scanning system, various design systems, a wired and wireless network, and dual UNIX servers in each of our stores. These systems provide the stores with real-time perpetual inventory information, support all in-store selling, support labor planning and management, and provide support for a variety of store administrative functions. In addition, these store systems provide the customer support center organizations with information needed to support the stores. Key customer support center groups using this information include inventory replenishment, finance, human resources and merchandising. Store information is communicated to the customer support center's central computers via a terrestrial based (MPLS) network with back-up provided by a satellite-based wide area network. These corporate systems provide customer checkout with automated credit card and check approval, host a variety of centralized design and specialty order systems for the stores, provide store-based perpetual inventory information, provide sales performance reporting, and support accurate processing of store sales transactions. In addition to the store and corporate office computing infrastructure, we also have significant computing capacity at each RDC to support these highly automated facilities.

We have invested significant resources to safeguard sensitive employee and customer information. We work closely with industry standards groups to incorporate security best practices into our technology environment. Our two state-of-the-art data centers provide many additional fail-safe features to improve system availability and mitigate risks associated with unplanned outages. Our second data center opened in late 2007 and provides complete back-up to our primary facility. With these two facilities, the Company is well positioned for future growth.


As of February 1, 2008, we employed approximately 160,000 full-time and 56,000 part-time employees, none of which are covered by collective bargaining agreements. Management considers its relations with its employees to be good.


Compensation of Directors

Annual Retainer Fees. Directors who are not employed by the Company are paid an annual retainer of $75,000, and non-employee directors who serve as a committee chairman receive an additional $15,000 annually, or $25,000 annually in the case of the Audit Committee Chairman, for serving in such position. Directors who are employed by the Company receive no additional compensation for serving as directors. The annual retainer amount was last increased in 2002.

Stock Awards. In May 2005, shareholders approved an amended and restated Director’s Stock Option and Deferred Stock Unit Plan, allowing the Board to elect to grant deferred stock units or options to purchase Common Stock at the first directors’ meeting following the Annual Meeting of Shareholders each year (“Award Date”) to non-employee directors. Beginning with the directors’ meeting following the Annual Meeting of Shareholders held May 27, 2005, it has been the Board’s policy to grant only deferred stock units. Each deferred stock unit represents the right to receive one share of Lowe’s Common Stock. The annual grant of deferred stock units for each of the Company’s directors who is not employed by the Company is determined by taking the annual grant amount of $115,000 and dividing it by the closing price of a share of Lowe’s Common Stock as reported on the NYSE on the Award Date, which amount is then rounded up to the next 100 units. The deferred stock units receive dividend equivalent credits, in the form of additional units, for any cash dividends subsequently paid with respect to Common Stock. All units credited to a director are fully vested and will be paid in the form of Common Stock after the termination of the director’s service.

Deferral of Annual Retainer Fees. In 1994, the Board adopted the Lowe’s Companies, Inc. Directors’ Deferred Compensation Plan. This plan allows each non-employee director to defer receipt of all, but not less than all, of the annual retainer and any committee chairman fees otherwise payable to the director in cash. Deferrals are credited to a bookkeeping account and account values are adjusted based on the investment measure selected by the director. One investment measure adjusts the account value based on the Wachovia Bank, N.A. prime rate plus 1%, adjusted each quarter. The other investment measure assumes that the deferrals are invested in Lowe’s Common Stock with reinvestment of all dividends. A director may allocate deferrals between the two investment measures in 25% multiples. Account balances may not be reallocated between the investment measures. Account balances are paid in cash in a single sum payment following the termination of a director’s service.

Board Meetings and Committees of the Board

Attendance at Board and Committee Meetings. During fiscal year 2007, the Board of Directors held six meetings. All incumbent directors attended at least 75% of all meetings of the Board and the committees on which they served.

Executive Sessions of the Non-management Directors. The non-management directors, all of whom are independent, meet in regularly scheduled executive sessions. Mr. Sloan, Chairman of the Governance Committee, presides over these executive sessions and in his absence, the non-management directors may select another non-management director present to preside.

Attendance at Annual Meetings of Shareholders. Directors are expected to attend the Annual Meeting of Shareholders. All of the incumbent directors attended last year’s Annual Meeting of Shareholders.

Committees of the Board of Directors and their Charters. The Board has four standing committees: the Audit Committee; the Compensation and Organization Committee; the Executive Committee; and the Governance Committee. Each of these committees, other than the Executive Committee, acts pursuant to a written charter adopted by the Board of Directors. The Executive Committee operates in accordance with specific provisions of the Bylaws. A copy of each written committee charter is available on our website at ( www.Lowes.com/investor ). You may also obtain a copy of each written committee charter by contacting Gaither M. Keener, Jr., Senior Vice President, General Counsel, Secretary and Chief Compliance Officer, at Lowe’s Companies, Inc., 1000 Lowe’s Boulevard, Mooresville, North Carolina 28117.

How to Communicate with the Board of Directors and Independent Directors. Interested persons wishing to communicate with the Board of Directors may do so by sending a written communication addressed to the Board or to any member individually in care of Lowe’s Companies, Inc., 1000 Lowe’s Boulevard, Mooresville, North Carolina 28117. Interested persons wishing to communicate with the independent directors as a group, may do so by sending a written communication addressed to O. Temple Sloan, Jr., as Chairman of the Governance Committee, in care of Lowe’s Companies, Inc., 1000 Lowe’s Boulevard, Mooresville, North Carolina 28117. Any communication addressed to a director that is received at Lowe’s principal executive offices will be delivered or forwarded to the individual director as soon as practicable. Lowe’s will forward all communications received from its shareholders or other interested persons that are addressed simply to the Board of Directors to the chairman of the committee of the Board of Directors whose purpose and function is most closely related to the subject matter of the communication.


This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and nine month periods ended November 2, 2007 and November 3, 2006. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2007 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.


The following discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements (unaudited) and notes to consolidated financial statements (unaudited) contained in this report that have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements 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 polices are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report. Our significant and critical accounting policies have not changed significantly since the filing of our Annual Report.


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 period.

The sales environment remained challenging in the third quarter of fiscal 2007, and we expect the external pressures facing our industry to continue into 2008. In today’s sales environment, we are focused on managing expenses, as well as evaluating ways to better leverage technology, our infrastructure and our people to efficiently drive sales and deliver great customer experiences. We are committed to disciplined inventory management, particularly for seasonal products, to ensure we minimize mark-downs while maximizing sales. Additionally, we are focused on the opportunities we see in the current environment to gain profitable market share.

We remain committed to providing excellent customer service in all sales environments, as well as identifying ways to increase store productivity. We know that maintaining the appropriate staffing complement in our stores is one of the keys to our continued success. During past periods of robust growth we staffed ahead of our sales by adding hours as sales trends approached the threshold that would trigger changes to the staffing complement, anticipating continued growth and ensuring that we stayed ahead of customer demand. We will not sacrifice service, and we will continue to align staffing levels with current sales trends. However, in this challenging sales environment, we are waiting to increase our base staffing hours until the sales threshold has been achieved. Our flexible staffing model enables us to react quickly to changing sales environments. Therefore, when sales improve we can efficiently add hours to support growth. With this approach, we remain confident that we will continue to provide the level of service customers have come to expect from Lowe’s, while driving efficiencies.

We are always looking for opportunities to leverage our logistics and distribution network. Approximately 75% of our goods are now running through our distribution network, and we continue to work with our vendor partners to drive efficiencies by streamlining and automating the receiving processes at our stores. Moving more products through our network allows more efficient receiving at our stores, which in turn provides us with more time to assist customers in the aisles. Additionally, because current sales levels are not what we expected, we have postponed the opening of our fourteenth regional distribution center (RDC) by six to nine months. The expense savings from postponing the opening of the RDC outweigh the costs associated with slightly longer hauls to our stores. We are confident that our current network has the capacity to ensure our stores remain in-stock and customer demand is met.

While we continue to identify ways to simplify the shopping experience and make our stores more operationally efficient, we are also looking for opportunities to gain profitable market share. We are evaluating the frequency and scope of our reset and remerchandising program. We are also looking for opportunities to gain additional advertising efficiencies, including better aligning our 18-month promotional calendar. Our market analysis provides insight into the impact of housing on our performance by region and enables us to better target promotions that connect with customers in local markets.

Net Sales – The increase in sales for both the quarter and nine months ended November 2, 2007 was driven by our store expansion program, which added 134 new stores during the last four quarters. However, a challenging sales environment led to a decline in comparable store sales of 4.3% for both the quarter and the first nine months of 2007. Total customer transactions increased 4.7% compared to the third quarter of 2006, while average ticket decreased 1.5% to $66.95. Comparable store customer transactions decreased 2.3% compared to the third quarter of 2006 and comparable store average ticket decreased 2.2%.

We experienced comparable store sales increases in two of our 20 product categories in the third quarter of 2007. The categories that performed above our average comparable store sales change for the third quarter included rough plumbing, hardware, paint, lighting, lawn & landscape products, appliances and home environment. In addition, fashion plumbing and cabinets/countertops performed at approximately the overall corporate average comparable store sales change. Despite the external pressures that affected the home improvement market, we continued to gain unit market share in 17 of our 20 product categories during the third calendar quarter versus the same period last year and gained 100 basis points in total store unit market share, according to independent third-party measures.

Housing related pressures on the consumer had the largest impact on sales for the third quarter. The deterioration in housing related metrics, combined with disruption in the credit markets, and the tightening of lending standards and credit availability impacted our performance. We are still experiencing regionally disparate performance, with our stores in California, Florida and the along the Gulf Coast experiencing double-digit negative comparable store sales. However, the change in sales trends we experienced in the quarter was broad based with many factors driving the decline in comparable store sales.

In addition to continued macroeconomic pressures, our sales were impacted by the drought experienced in several regions of the country, as well as warmer than normal temperatures throughout much of the quarter. As a result, our Nursery category experienced the largest decline versus year-to-date trends of any category. We also saw a significant decline in the performance of outdoor products in drought affected regions versus their second quarter trends.

As we have seen for the past few quarters, consumers remain hesitant to take on larger discretionary projects, including many projects offered through our Installed Sales and Special Order Sales programs. As a result, our sales in those areas fell short of our average comparable store sales change. Our Commercial Business Customer sales continued to perform well above the company average comparable store sales change. Our focus on maintenance and repair customers, who shop our entire store and are less dependent on the housing cycle, has helped ensure solid Commercial Business Customer sales and margin performance in 2007.

Gross Margin – Gross margin as a percentage of sales decreased 20 basis points from the third quarter of 2006. The decrease was primarily attributable to the timing of markdowns on seasonal inventory. Gross margin in the third quarter of 2006 benefited from an earlier markdown and sell through of seasonal products, which negatively impacted margin in the second quarter of 2006 but positively impacted margin in the third quarter of 2006. In 2007, the markdown process occurred in a more normalized fashion, with most seasonal markdowns occurring in the third quarter, which negatively impacted gross margin in the third quarter relative to the prior year. This de-leverage was partially offset by a positive impact of approximately 10 basis points from the mix of products sold and a positive impact of approximately 15 basis points from lower inventory shrink.

The increase in gross margin as a percentage of sales for the first nine months of 2007 compared to 2006 was attributable to the mix of products sold and a positive impact associated with a greater proportion of imported goods.

SG&A – SG&A de-leveraged 93 basis points in the third quarter of 2007 versus the prior year, driven by de-leverage of 64 basis points in store payroll as a result of the weak sales environment. Additionally, bonus and retirement plan expenses de-leveraged 47 basis points compared to the third quarter of 2006, due to accrual reversals in last year’s third quarter as a result of declining performance. In addition, rent, property taxes, utilities and other fixed expenses de-leveraged due to the comparable store sales decline. This de-leverage was offset by a $112 million reduction in casualty self-insurance expenses in the third quarter of 2007. Similarly, we had a favorable adjustment to our self-insurance reserves of $77 million in the third quarter of 2006. The net impact of these adjustments resulted in leverage of 32 basis points in casualty self-insurance expenses in the third quarter of 2007 compared to 2006. Our efforts over the past several years to maintain a safe shopping and working environment have resulted in a reduction in both claim incidence and severity. These efforts as well as state regulatory changes contributed to actuarial projections of lower costs to settle claims filed and claims incurred but not reported, which led to a reduction of our actuarially determined self-insurance liability.

The increase in SG&A as a percentage of sales for the first nine months was similarly driven by de-leverage in store payroll and fixed expenses, such as rent, property taxes and utilities, as a result of softer sales. This was partially offset by leverage in advertising, store services and casualty self-insurance expenses.

Store Opening Costs - Store opening costs, which include payroll and supply costs incurred prior to store opening as well as grand opening advertising costs, totaled $41 million and $44 million in the third quarters of 2007 and 2006, respectively. Because store opening costs are expensed as incurred, the timing of expense recognition fluctuates based on the timing of store openings. We opened 40 new stores in the third quarter of 2007, compared to the opening of 49 new stores in the third quarter of 2006. Store opening costs for stores opened during both the third quarter of 2007 and 2006 averaged approximately $0.8 million per store.

Store opening costs of $79 million and $97 million for the first nine months of 2007 and 2006, respectively, were associated with the opening of 81 stores in 2007 (79 new and 2 relocated), compared to 97 stores in 2006 (96 new and 1 relocated). Store opening costs for stores opened during the first nine months of 2007 averaged approximately $0.7 million per store compared to approximately $0.9 million for stores opened in the first nine months of 2006. The decrease in average opening costs per store was driven by higher average payroll costs in the first nine months of 2006 resulting from stores opening in higher cost markets.

Depreciation - The de-leverage in depreciation for the three and nine month periods ended November 2, 2007, was driven by the opening of 134 new stores over the past four quarters and negative comparable store sales. Property, less accumulated depreciation, totaled $20.8 billion at November 2, 2007, an increase of 14.1% from $18.2 billion at November 3, 2006. At November 2, 2007, we owned 86% of our stores, compared to 84% at November 3, 2006, which includes stores on leased land.

Interest – The de-leverage in interest expense for the three and nine month periods ended November 2, 2007, was primarily due to additional expense as a result of the October 2006 $1 billion debt issuance and the September 2007 $1.3 billion debt issuance.

Income Tax Provision - Our effective income tax rate was 37.6% and 37.8% for the three and nine month periods ended November 2, 2007, respectively, and 38.2% and 38.4% for the three and nine month periods ended November 3, 2006, respectively. Our effective income tax rate was 37.9% for fiscal 2006.


Our primary sources of liquidity are cash flows from operating activities and our $1.75 billion senior credit facility that expires in July 2012. Net cash provided by operating activities totaled $3.8 billion and $3.6 billion for the nine month periods ended November 2, 2007 and November 3, 2006. The change in cash flows from operating activities was primarily the result of the timing of cash payments and an improvement in payment terms related to merchandise purchases.

The primary component of net cash used in investing activities continues to be opening new stores, investing in existing stores through resets and remerchandising, and investing in our distribution center and information technology infrastructure. Cash acquisitions of fixed assets were $ 2.9 billion and $2.7 billion for the nine month periods ended November 2, 2007 and November 3, 2006, respectively. At November 2, 2007, we operated 1,464 stores in 49 states with 166 million square feet of retail selling space, representing a 10 % increase over the retail selling space at November 3, 2006.

Net cash used in financing activities was $ 964 million and $865 million for the nine month periods ended November 2, 2007 and November 3, 2006, respectively. The change in cash flows from financing activities was primarily the result of increased share repurchases compared to the first nine months of 2006 and an increase in the amount of dividends paid per share from $0.13 in the first nine months of fiscal 2006 to $0. 21 in the first nine months of fiscal 2007 . This was partially offset by the September 2007 $1.3 billion debt offering . T he ratio of debt to equity plus debt was 26.0%, 22.7% and 22.0% as of November 2, 2007, November 3, 2006 and February 2, 2007, respectively.

Our initial 2007 capital forecast was $4.6 billion, inclusive of approximately $300 million of lease commitments, resulting in a planned net cash outflow of $4.3 billion in 2007. As of the end of the third quarter of 2007, we expect that net cash outflows will be $4.1 billion, versus the forecasted amount of $4.3 billion. Approximately 80% of this expected commitment is for store expansion and new distribution centers. Expansion plans for 2007 consist of approximately 153 stores, including four relocations of older stores, increasing our total sales floor square footage by approximately 11% for the year. Approximately 99% of the 2007 projects will be owned, which includes approximately 30% that will be ground-leased properties.

As of November 2, 2007, we owned and operated 13 RDCs. We opened a new RDC in Rockford, Illinois in the first quarter of 2007 and a new RDC in Lebanon, Oregon in the second quarter of 2007. We delayed the opening of our next RDC to the latter half of 2008. As of November 2, 2007, we also operated 14 flatbed distribution centers (FDCs) for the handling of lumber, building materials and other long-length items. We owned 12 and leased two of these FDCs. We opened a new FDC in Port of Stockton, California in the first quarter of 2007. We expect to open an additional FDC in fiscal 2008.

On June 15, 2007, we entered into an Amended and Restated Credit Agreement (Amended Facility) to modify the senior credit facility dated July 30, 2004, which provided for borrowings of up to $1 billion through July 2009. The Amended Facility extends the maturity date to June 2012 and provides for borrowings of up to $1.75 billion. The Amended Facility supports our commercial paper and revolving credit programs. Borrowings made are unsecured and are priced at a fixed rate based upon market conditions at the time of funding in accordance with the terms of the Amended Facility. The Amended Facility contains certain restrictive covenants, which include maintenance of a debt leverage ratio as defined by the Amended Facility. We were in compliance with those covenants at November 2, 2007. Seventeen banking institutions are participating in the Amended Facility. As of November 2, 2007, there were no outstanding borrowings under the Amended Facility or under the commercial paper program.

On October 3, 2007, we established a Canadian dollar (C$) denominated credit facility in the amount of C$50 million, which provides support for our Canadian operations. This uncommitted facility provides us the ability to make unsecured borrowings, which are priced at a fixed rate based upon market conditions at the time of funding in accordance with the terms of the credit facility. As of November 2, 2007, there was C$15 million or the equivalent of $16 million outstanding under the credit facility. The interest rate on the short-term borrowing was 4.8%.

From their issuance through the end of the third quarter of 2007, principal amounts of $985 million, or approximately 98%, of our February 2001 convertible notes had converted from debt to equity. Of this total, principal amounts of $12 million were converted in the third quarter of 2007. An insignificant amount was converted in the third quarter of 2006. Principal amounts of $18 million and $107 million were converted in the nine month periods ending November 2, 2007 and November 3, 2006, respectively.

Holders of the senior convertible notes, issued in October 2001, may convert their notes into 34.424 shares of the company’s common stock only if: the closing share price of the company’s common stock reaches specified thresholds, or the credit rating of the notes is below a specified level, or the notes are called for redemption, or specified corporate transactions representing a change in control have occurred. There is no indication that we will not be able to maintain the minimum investment grade rating. From their issuance through the end of the third quarter of 2007, an insignificant amount of the senior convertible notes had converted from debt to equity. During the fourth quarter of 2006 and first and second quarters of 2007, our closing share prices reached the specified threshold such that the senior convertible notes became convertible at the option of each holder into shares of common stock in the first, second and third quarters of 2007. The senior convertible notes will not become convertible in the fourth quarter of 2007 because our closing share prices did not reach the specified threshold. Cash interest payments on the senior convertible notes ceased in October 2006. We may redeem for cash all or a portion of the notes at any time, at a price equal to the sum of the issue price plus accrued original issue discount on the redemption date.


Fourth Quarter

As of November 19, 2007, the date of our third quarter 2007 earnings release, we expected to open approximately 72 stores during the fourth quarter of fiscal 2007, which ends on February 1, 2008, reflecting square footage growth of approximately 11%. Total sales were expected to increase approximately 3%. Comparable store sales were expected to decline 3% to 5%. We expected diluted earnings per share of $0.25 to $0.29. All comparisons are with the fourth quarter of fiscal 2006.

Fiscal 2007

As of November 19, 2007, the date of our third quarter 2007 earnings release, we expected to open approximately 153 stores during fiscal 2007, which ends on February 1, 2008, reflecting total square footage growth of approximately 11%. Total sales were expected to increase 3% to 4% for the year. Comparable store sales were expected to decline approximately 4%. We expected diluted earnings per share of $1.83 to $1.87. All comparisons are with fiscal 2006.

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