10-Q 1 lowesform10q07292011.htm LOWE'S FORM 10-Q 07-29-2011 lowesform10q07292011.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2011
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to  ______

 
Commission file number
1-7898
 
LOWE'S LOGO

LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
 
NORTH CAROLINA
56-0578072
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
1000 Lowe's Blvd., Mooresville, NC
28117
(Address of principal executive offices)
(Zip Code)
   
Registrant's telephone number, including area code
(704) 758-1000  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
x Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
Accelerated filer   o
Non-accelerated filer    o
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

CLASS
 
OUTSTANDING AT AUGUST 26, 2011
Common Stock, $.50 par value
 
1,260,527,156

 
 
 

 

 
- INDEX -
     
PART I - Financial Information
Page No.
     
Item 1.
Financial Statements
 
     
 
3
     
 
4
     
 
5
     
 
6 - 13
     
 
14
     
Item 2.
15 - 21
 
 
 
Item 3.
21
     
Item 4. 
21
     
PART II- Other Information
 
   
Item 1A.
22
     
Item 2.
22
     
Item 6.
23 - 24
     
Signature
 
25
     
 
 
 
 

 
 
Part I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
Item 1.  Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lowe's Companies, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In Millions, Except Par Value Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      (Unaudited)  
(Unaudited)
 
 
 
 
 
 
   
July 29, 2011
 
July 30, 2010
 
January 28, 2011
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
$
 568
 
$
 1,191
 
$
 652
 
Short-term investments
 
 
 
 340
 
 
 816
 
 
 471
 
Merchandise inventory - net
 
 
 
 8,825
 
 
 8,653
 
 
 8,321
 
Deferred income taxes - net
 
 
 
 222
 
 
 205
 
 
 193
 
Other current assets
 
 
 
 213
 
 
 256
 
 
 330
 
 
 
 
 
 
 
 
 
 
 
 
 
Total current assets
 
 
 
 10,168
 
 
 11,121
 
 
 9,967
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, less accumulated depreciation
 
 
 
 22,195
 
 
 22,274
 
 
 22,089
 
Long-term investments
 
 
 
 857
 
 
 730
 
 
 1,008
 
Other assets
 
 
 
 825
 
 
 508
 
 
 635
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
 34,045
 
$
 34,633
 
$
 33,699
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
 
 
$
 39
 
$
 37
 
$
 36
 
Accounts payable
 
 
 
 5,378
 
 
 4,888
 
 
 4,351
 
Accrued compensation and employee benefits
 
 
 
 495
 
 
 537
 
 
 667
 
Deferred revenue
 
 
 
 831
 
 
 770
 
 
 707
 
Other current liabilities
 
 
 
 1,934
 
 
 1,761
 
 
 1,358
 
 
 
 
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
 
 8,677
 
 
 7,993
 
 
 7,119
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, excluding current maturities
 
 
 
 6,581
 
 
 5,533
 
 
 6,537
 
Deferred income taxes - net
 
 
 
 479
 
 
 459
 
 
 467
 
Deferred revenue - extended protection plans
 
 
 
 673
 
 
 605
 
 
 631
 
Other liabilities
 
 
 
 856
 
 
 830
 
 
 833
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
 
 17,266
 
 
 15,420
 
 
 15,587
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock - $5 par value, none issued
 
 
 
 - 
 
 
 - 
 
 
 - 
 
Common stock - $.50 par value;
 
 
 
 
 
 
 
 
 
 
 
Shares issued and outstanding
 
 
 
 
 
 
 
 
 
 
 
July 29, 2011
1,260
   
 
 
 
 
 
 
 
 
July 30, 2010
1,423
   
 
 
 
 
 
 
 
 
January 28, 2011
1,354
   
 630
 
 
 711
 
 
 677
 
Capital in excess of par value
 
 
 
 7
 
 
 9
 
 
 11
 
Retained earnings
 
 
 
 16,060
 
 
 18,454
 
 
 17,371
 
Accumulated other comprehensive income
 
 
 
 82
 
 
 39
 
 
 53
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
 
 
 16,779
 
 
 19,213
 
 
 18,112
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
 
$
 34,045
 
$
 34,633
 
$
 33,699
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the consolidated financial statements (unaudited).
 
 
 
 

 
3

 
Table of Contents

 Lowe's Companies, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 In Millions, Except Per Share Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Three Months Ended
 
Six Months Ended
 
   
July 29, 2011
 
July 30, 2010
 
July 29, 2011
 
July 30, 2010
 
Current Earnings
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Net sales
  $ 14,543     100.00   $ 14,361     100.00   $ 26,728     100.00   $ 26,749     100.00  
                                                   
Cost of sales
    9,527     65.51     9,355     65.14     17,393     65.07     17,384     64.99  
                                                   
Gross margin
    5,016     34.49     5,006     34.86     9,335     34.93     9,365     35.01  
                                                   
Expenses:
                                                 
                                                   
Selling, general and administrative
    3,232     22.22     3,189     22.21     6,351     23.76     6,283     23.49  
                                                   
Depreciation
    365     2.51     398     2.77     737     2.76     795     2.97  
                                                   
Interest - net
    90     0.62     84     0.59     178     0.67     166     0.62  
                                                   
Total expenses
    3,687     25.35     3,671     25.57     7,266     27.19     7,244     27.08  
                                                   
Pre-tax earnings
    1,329     9.14     1,335     9.29     2,069     7.74     2,121     7.93  
                                                   
Income tax provision
    499     3.43     503     3.50     777     2.91     800     2.99  
                                                   
Net earnings
  $ 830     5.71   $ 832     5.79   $ 1,292     4.83   $ 1,321     4.94  
                                                   
                                                   
Weighted average common shares outstanding - basic
    1,275           1,417           1,300           1,427        
                                                   
Basic earnings per common share
  $ 0.65         $ 0.58         $ 0.99         $ 0.92        
                                                   
Weighted average common shares outstanding - diluted
    1,278           1,419           1,303           1,430        
                                                   
Diluted earnings per common share
  $ 0.64         $ 0.58         $ 0.98         $ 0.92        
                                                   
Cash dividends per share
  $ 0.14         $ 0.11         $ 0.25         $ 0.20        
                                                   
                                                   
Retained Earnings
                                                 
Balance at beginning of period
  $ 16,715         $ 18,246         $ 17,371         $ 18,307        
Net earnings
    830           832           1,292           1,321        
Cash dividends
    (176         (157         (322         (287      
Share repurchases
    (1,309         (467         (2,281         (887      
Balance at end of period
  $ 16,060         $ 18,454         $ 16,060         $ 18,454        
                                                   
                                                   
See accompanying notes to the consolidated financial statements (unaudited).
                         
                                 
 

 
4

 
Table of Contents

Lowe's Companies, Inc.
 
 
   
 
 
 
 
   
 
 
In Millions
 
 
   
 
 
 
 
 
   
 
 
 
 
Six Months Ended
 
 
 
July 29, 2011
   
July 30, 2010
 
Cash flows from operating activities:
 
 
   
 
 
Net earnings
  $ 1,292     $ 1,321  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    786       848  
Deferred income taxes
    (50 )     (143 )
Loss on property and other assets - net
    100       16  
Share-based payment expense
    59       55  
Net changes in operating assets and liabilities:
               
Merchandise inventory - net
    (495 )     (400 )
Other operating assets
    125       (41 )
Accounts payable
    1,026       600  
Other operating liabilities
    450       526  
Net cash provided by operating activities
    3,293       2,782  
 
               
Cash flows from investing activities:
               
Purchases of investments
    (948 )     (1,458 )
Proceeds from sale/maturity of investments
    1,232       609  
Increase in other long-term assets
    (218 )     (16 )
Property acquired
    (780 )     (612 )
Proceeds from sale of property and other long-term assets
    20       9  
Net cash used in investing activities
    (694 )     (1,468 )
 
               
Cash flows from financing activities:
               
Net proceeds from issuance of long-term debt
    -       991  
Repayment of long-term debt
    (18 )     (534 )
Proceeds from issuance of common stock under share-based payment plans
    55       62  
Cash dividend payments
    (294 )     (261 )
Repurchase of common stock
    (2,433 )     (1,015 )
Excess tax benefits of share-based payments
    3       1  
Net cash used in financing activities
    (2,687 )     (756 )
 
               
Effect of exchange rate changes on cash
    4       1  
 
               
Net (decrease)/increase in cash and cash equivalents
    (84 )     559  
Cash and cash equivalents, beginning of period
    652       632  
Cash and cash equivalents, end of period
  $ 568     $ 1,191  
 
               
 
               
See accompanying notes to the consolidated financial statements (unaudited).
               
 

 
5

 
 
Lowe's Companies, Inc.

Note 1: Basis of Presentation - The accompanying consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) are presented 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 consolidated financial statements (unaudited), in the opinion of management, contain all adjustments necessary to present fairly the financial position as of July 29, 2011, and July 30, 2010, and the results of operations for the three and six months ended July 29, 2011, and July 30, 2010, and cash flows for the six months ended July 29, 2011 and July 30, 2010.

These interim consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Lowe's Companies, Inc. (the Company) Annual Report on Form 10-K for the fiscal year ended January 28, 2011 (the Annual Report).  The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Certain prior period amounts have been reclassified to conform to current classifications. Deferred revenue – extended protection plans, which was previously included in other liabilities (noncurrent), is now a separate line item on the consolidated balance sheets.

Note 2: Fair Value Measurements and Financial Instruments - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of the hierarchy are defined as follows:

·  
Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities

·  
Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

·  
Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities

The following tables present the Company’s financial assets measured at fair value on a recurring basis as of July 29, 2011, July 30, 2010, and January 28, 2011, classified by fair value hierarchy:
 
 
 
6

 
 
 
 
 
  Fair Value Measurements at Reporting Date Using  
 
 
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
(In millions)
 
July 29, 2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
Municipal obligations
  $ 142     $ -      $ 142      $ -  
Money market funds
    95       95       -       -  
Municipal floating rate obligations
    48       -       48       -  
Other
    2       2       -       -  
Trading securities:
                               
Mutual funds
    53       53       -       -  
Total short-term investments
  $ 340     $ 150      $ 190      $ -  
Available-for-sale securities:
                               
Municipal floating rate obligations
  $ 641     $ -      $ 641      $ -  
Municipal obligations
    196       -       196       -  
Other
    20       -       20       -  
Total long-term investments
  $ 857     $ -      $ 857      $ -  
 
                               
            Fair Value Measurements at Reporting Date Using  
 
         
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
 
       
(In millions)
 
July 30, 2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities:
                               
Municipal obligations
  $ 251     $ -     251      $ -  
Money market funds
    143       143       -       -  
Municipal floating rate obligations
    372       -       372       -  
Other
    5       2       3       -  
Trading securities:
                               
Mutual funds
    45       45       -       -  
Total short-term investments
  $ 816     $ 190      $ 626      $ -  
Available-for-sale securities:
                               
Municipal floating rate obligations
  $ 698     $ -      $ 698      $ -  
Municipal obligations
    32       -       32       -  
Total long-term investments
  $ 730     $ -      $ 730      $ -  
 
 
 
7

 
 
 
 
   
Fair Value Measurements at Reporting Date Using
 
 
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
 
 
 
(In millions)
January 28, 2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available-for-sale securities:
 
   
 
   
 
   
 
 
Municipal obligations
$ 190     $ -     $ 190     $ -  
Money market funds
  66       66       -       -  
Municipal floating rate obligations
  163       -       163       -  
Other
  2       2       -       -  
Trading securities:
                             
Mutual funds
  50       50       -       -  
Total short-term investments
$ 471     $ 118     $ 353     $ -  
Available-for-sale securities:
                             
Municipal floating rate obligations
$ 765     $ -     $ 765     $ -  
Municipal obligations
  208       -       208       -  
Other
  35       -       35       -  
Total long-term investments
$ 1,008     $ -     $ 1,008     $ -  

When available, quoted prices were used to determine fair value.  When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy.  When quoted prices in active markets were not available, fair values were determined using pricing models and the inputs to those pricing models are based on observable market inputs.  The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

During the six months ended July 29, 2011 and July 30, 2010, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were certain assets subject to long-lived asset impairment.

The Company reviews the carrying amounts of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds its fair value.  The Company estimated the fair values of assets subject to long-lived asset impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available. The Company classified these fair value measurements as Level 3.

In the determination of impairment for operating locations, the Company determined the fair values of individual operating locations using an income approach, which required discounting projected future cash flows.  When determining the stream of projected future cash flows associated with an individual operating location, management made assumptions, incorporating local market conditions, about key variables including sales growth rates, gross margin and controllable expenses such as payroll and occupancy expense.  In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows.  In general, the selected market participants represent a group of other retailers with a location footprint similar in size to the Company’s.
 
In the determination of impairment for locations identified for closure and for excess properties held-for-use and held-for-sale, which consist of retail outparcels and property associated with relocated or closed locations, the fair values were
 
 
8

 

determined using a market approach based on estimated selling prices. The Company determined the estimated selling prices by obtaining information from property brokers or appraisers in the specific markets being evaluated. The information included comparable sales of similar assets and assumptions about demand in the market for these assets.

The following tables present the Company’s non-financial assets measured at estimated fair value on a nonrecurring basis and the resulting long-lived asset impairment losses included in earnings. Because assets subject to long-lived asset impairment are not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at July 29, 2011 and July 30, 2010.
 
Fair Value Measurements - Nonrecurring Basis
 
 
   
 
   
 
 
   
Three Months Ended
 
   
July 29, 2011
   
July 30, 2010
 
(In millions)
 
Fair Value Measurements
   
Impairment Losses
   
Fair Value Measurements
   
Impairment Losses
 
Assets held-for-use:
 
 
   
 
   
 
   
 
 
Operating locations
  $ 9     $ (18 )   $ 1     $ (7 )
Locations identified for closure
    21       (60 )     -       -  
Excess properties
    18       (5 )     9       (2 )
Assets held-for-sale:
                               
Excess properties
    1       -       21       (1 )
Total
  $ 49     $ (83 )   $ 31     $ (10 )
                                 
   
Six Months Ended
 
   
July 29, 2011
   
July 30, 2010
 
(In millions)
 
Fair Value Measurements
   
Impairment Losses
   
Fair Value Measurements
   
Impairment Losses
 
Assets held-for-use:
                               
Operating locations
  $ 9     $ (18 )   $ 1     $ (7 )
Locations identified for closure
    21       (60 )     -       -  
Excess properties
    22       (11 )     10       (3 )
Assets held-for-sale:
                               
Excess properties
    2       -       21       (1 )
Total
  $ 54     $ (89 )   $ 32     $ (11 )

Fair Value of Financial Instruments

The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt and are reflected in the financial statements at cost.  With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature.  Estimated fair values for long-term debt have been determined using available market information, including reported trades, benchmark yields and broker-dealer quotes.

 
9

 

Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease obligations, are as follows:

 
 
July 29, 2011
   
July 30, 2010
 
 
 
Carrying
   
Fair
   
Carrying
   
Fair
 
(In millions)
 
Amount
   
Value
   
Amount
   
Value
 
Long-term debt (excluding capitalized lease obligations)
  $ 6,215     $ 6,961     $ 5,213     $ 5,972  
 
Note 3: Restricted Investment Balances - Short-term and long-term investments include restricted balances pledged as collateral for the Company’s extended protection plan program and for a portion of the Company’s casualty insurance and Installed Sales program liabilities.  Restricted balances included in short-term investments were $163 million at July 29, 2011, $246 million at July 30, 2010, and $102 million at January 28, 2011.  Restricted balances included in long-term investments were $256 million at July 29, 2011, $144 million at July 30, 2010, and $260 million at January 28, 2011.

Note 4: Property - Property is shown net of accumulated depreciation of $11.9 billion at July 29, 2011, $10.5 billion at July 30, 2010, and $11.3 billion at January 28, 2011.

Note 5: Exit Activities - When locations under operating leases are closed, the Company recognizes a liability for the fair value of future contractual obligations, including future minimum lease payments, property taxes, utilities, and common area maintenance, net of estimated sublease income and other recoverable items.  Expenses associated with accruals for exit activities are recorded in selling, general and administrative expense on the consolidated statements of current and retained earnings and were $6 million and $13 million, respectively, for the three and six months ended July 29, 2011. At July 29, 2011, the liability for exit activities was $22 million. Expenses associated with accruals for exit activities for the three and six months ended July 30, 2010, and the liability for exit activities at July 30, 2010, were immaterial.

Note 6: Extended Protection Plans - The Company sells separately-priced extended protection plan contracts under a Lowe’s-branded program for which the Company is ultimately self-insured.  The Company recognizes revenue from extended protection plan sales on a straight-line basis over the respective contract term.  Extended protection plan contract terms primarily range from one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable.  Changes in deferred revenue for extended protection plan contracts are summarized as follows:

 
Three Months Ended
 
Six Months Ended
 
(In millions)
July 29, 2011
 
July 30, 2010
 
July 29, 2011
 
July 30, 2010
 
Deferred revenue - extended protection plans, beginning of period
$ 650   $ 576   $ 631   $ 549  
Additions to deferred revenue
  70     70     135     138  
Deferred revenue recognized
  (47 )   (41 )   (93 )   (82 )
Deferred revenue - extended protection plans, end of period
$ 673   $ 605   $ 673   $ 605  

Incremental direct acquisition costs associated with the sale of extended protection plans are also deferred and recognized as expense on a straight-line basis over the respective contract term.  Deferred costs associated with extended protection plan contracts were $160 million at July 29, 2011, $167 million at July 30, 2010, and $166 million at January 28, 2011.  The Company’s extended protection plan deferred costs are included in other assets (non-current) on the consolidated balance sheets.  All other costs, such as costs of services performed under the contract, general and administrative expenses and advertising expenses are expensed as incurred.
 
 
10

 
 
The liability for extended protection plan claims incurred is included in other current liabilities on the consolidated balance sheets.  Changes in the liability for extended protection plan claims are summarized as follows:

 
Three Months Ended
 
Six Months Ended
 
(In millions)
July 29, 2011
 
July 30, 2010
 
July 29, 2011
 
July 30, 2010
 
Liability for extended protection plan claims, beginning of period
$ 19   $ 23   $ 20   $ 23  
Accrual for claims incurred
  26     20     45     37  
Claim payments
  (21 )   (17 )   (41 )   (34 )
Liability for extended protection plan claims, end of period
$ 24   $ 26   $ 24   $ 26  
 
Note 7: Shareholders' Equity - The Company has a share repurchase program that is executed through purchases made from time to time either in the open market or through private transactions.  Shares purchased under the share repurchase program are retired and returned to authorized and unissued status.  The Company’s Board of Directors authorized up to $5.0 billion of share repurchases on January 29, 2010 with no expiration. During the three months ended July 29, 2011, the Company utilized the remaining authorization under the share repurchase program as of that date. On August 19, 2011, the Company's Board of Directors authorized an additional $5.0 billion of share repurchases with no expiration.

The Company also repurchases shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of restricted stock awards.

Shares repurchased for the three and six months ended July 29, 2011 and July 30, 2010 were as follows:

 
 
Three Months Ended
 
 
 
July 29, 2011
   
July 30, 2010
 
(In millions)
 
Shares
   
Cost 1
   
Shares
   
Cost 1
 
Share repurchase program
    59.7     $ 1,400       22.7     $ 550  
Shares repurchased from employees
    0.1       2       -       -  
Total share repurchases
    59.8     $ 1,402       22.7     $ 550  
 
                               
 
 
Six Months Ended
 
 
 
July 29, 2011
   
July 30, 2010
 
(In millions)
 
Shares
   
Cost 2
   
Shares
   
Cost 2
 
Share repurchase program
    97.5     $ 2,400       41.3     $ 1,000  
Shares repurchased from employees
    1.4       35       0.6       15  
Total share repurchases
    98.9     $ 2,435       41.9     $ 1,015  

1   Reductions of $1.3 billion and $467 million were recorded to retained earnings, after capital in excess of par value was depleted, for the three months ended July 29, 2011 and July 30, 2010, respectively.

2   Reductions of $2.3 billion and $887 million were recorded to retained earnings, after capital in excess of par value was depleted, for the six months ended July 29, 2011 and July 30, 2010, respectively.

Note 8: Comprehensive Income - Comprehensive income represents changes in shareholders’ equity from non-owner sources and is comprised of net earnings plus or minus unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments.  The following table reconciles net earnings to comprehensive income for the three and six months ended July 29, 2011 and July 30, 2010.

 
11

 

 
Three Months Ended
   
Six Months Ended
 
(In millions)
July 29, 2011
   
July 30, 2010
   
July 29, 2011
   
July 30, 2010
 
Net earnings
$ 830     $ 832     $ 1,292     $ 1,321  
Foreign currency translation adjustments
  (4 )     (6 )     27       13  
Net unrealized investment gains (losses)
  1       -       2       (1 )
Comprehensive income
$ 827     $ 826     $ 1,321     $ 1,333  

Note 9: Income Taxes - The Company is subject to examination by various foreign and domestic taxing authorities.  At July 29, 2011, the Company had unrecognized tax benefits of $151 million.  The Company is appealing IRS examinations for fiscal years 2004 to 2007 related to insurance deductions.  It is reasonably possible this issue as well as various U.S. state issues will be settled within the next twelve months resulting in a reduction in unrecognized tax benefits of $133 million.  There are currently ongoing U.S. state audits covering tax years 2002 to 2009.  The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.
 
Note 10: Earnings Per Share - The Company calculates basic and diluted earnings per common share using the two-class method.  Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company’s participating securities consist of unvested share-based payment awards that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders.

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period.  Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.  The following table reconciles earnings per common share for the three and six months ended July 29, 2011, and July 30, 2010.

 
 
Three Months Ended
   
Six Months Ended
 
(In millions, except per share data)
 
July 29, 2011
   
July 30, 2010
   
July 29, 2011
   
July 30, 2010
 
Basic earnings per common share:
 
 
   
 
   
 
   
 
 
Net earnings
  $ 830     $ 832     $ 1,292     $ 1,321  
Less: Net earnings allocable to participating securities
    (7     (7     (11     (11
Net earnings allocable to common shares
  $ 823     $ 825     $ 1,281     $ 1,310  
Weighted-average common shares outstanding
    1,275       1,417       1,300       1,427  
Basic earnings per common share
  $ 0.65     $ 0.58     $ 0.99     $ 0.92  
Diluted earnings per common share:
                               
Net earnings
  $ 830     $ 832     $ 1,292     $ 1,321  
Less: Net earnings allocable to participating securities
    (7     (7     (11     (11 )
Net earnings allocable to common shares
  $ 823     $ 825     $ 1,281     $ 1,310  
Weighted-average common shares outstanding
    1,275       1,417       1,300       1,427  
Dilutive effect of non-participating share-based awards
    3       2       3       3  
Weighted-average common shares, as adjusted
    1,278       1,419       1,303       1,430  
Diluted earnings per common share
  $ 0.64     $ 0.58     $ 0.98     $ 0.92  
 
 
12

 
 
Stock options to purchase 18.3 million and 20.2 million shares of common stock were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive for the three months ended July 29, 2011, and July 30, 2010, respectively.  Stock options to purchase 14.6 million and 19.7 million shares of common stock were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive for the six months ended July 29, 2011, and July 30, 2010, respectively.
 
Note 11: Supplemental Disclosure -

Net interest expense is comprised of the following:
 
 
 
 
   
 
   
 
   
 
 
 
Three Months Ended
 
Six Months Ended
 
(In millions)
July 29, 2011
 
July 30, 2010
 
July 29, 2011
 
July 30, 2010
 
Long-term debt
  $ 83     $ 78     $ 167     $ 154  
Capitalized lease obligations
    9       9       18       18  
Interest income
    (3 )     (3 )     (7 )     (6 )
Interest capitalized
    (2 )     (4 )     (4 )     (7 )
Interest on tax uncertainties
    2       2       1       3  
Other
    1       2       3       4  
Interest - net
  $ 90     $ 84     $ 178     $ 166  

Supplemental disclosures of cash flow information: 
 
 
   
 
 
 
 
 
   
 
 
 
Six Months Ended
 
(In millions)
July 29, 2011
 
July 30, 2010
 
Cash paid for interest, net of amount capitalized
  $ 179     $ 158  
Cash paid for income taxes
  $ 540     $ 818  
Non-cash investing and financing activities:
               
Non-cash property acquisitions, including assets acquired under capital lease
  $ 188     $ 34  
Loss on equity method investments
  $ (4 )   $ (2 )
Cash dividends declared but not paid
  $ 176     $ 157  
Non-cash employee stock option exercises
  $ 2     $ -  

Note 12: Recent Accounting Pronouncements - In May 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance that amends the existing requirements for fair value measurement and disclosure.  The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.  It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity.   The guidance is effective for interim and annual periods beginning after December 15, 2011.  The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued authoritative guidance that amends the presentation requirements for comprehensive income in financial statements. The guidance requires entities to report components of comprehensive income either as part of a single continuous statement of comprehensive income that would combine the components of net income and other comprehensive income, or in a separate, but consecutive, statement following the statement of income.  The guidance is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The adoption of this guidance will impact the presentation of comprehensive income, but will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
 
 
 
13

 
 

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Mooresville, North Carolina

We have reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of July 29, 2011 and July 30, 2010, and the related consolidated statements of current and retained earnings for the fiscal three and six-month periods then ended and of cash flows for the fiscal six-month periods ended July 29, 2011 and July 30, 2010. These consolidated interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of January 28, 2011, and the related consolidated statements of current and retained earnings, shareholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated March 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet of the Company as of January 28, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
 
/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina
August 30, 2011
 
 
 
14

 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and six months ended July 29, 2011, and July 30, 2010.  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 January 28, 2011 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.  Unless otherwise specified, all comparisons made are to the corresponding period of 2010.  This discussion and analysis is presented in seven sections:

·  
Executive Overview
·  
Operations
·  
Company Outlook
·  
Financial Condition, Liquidity and Capital Resources
·  
Off-Balance Sheet Arrangements
·  
Contractual Obligations and Commercial Commitments
·  
Critical Accounting Policies and Estimates

EXECUTIVE OVERVIEW

Despite some recovery from the first quarter in our seasonal business, comparable store sales declined 0.3% in the second quarter of 2011. Unfavorable weather in certain regions of the U.S. and difficult comparisons to prior year government stimulus programs contributed to softer performance compared to the prior year’s second quarter.  With regard to home improvement spending, consumers continued to focus on small-ticket repair and maintenance items and projects rather than larger discretionary projects.

Slowing economic growth and the recent downgrade in the U.S. credit rating have underscored continued weakness in the U.S. economy and have had an unsettling impact on equity markets. These issues are having a significant effect on consumer sentiment.  Despite these challenges, we remain focused on providing value to the customer every day. We are reinforcing our efforts to improve our price image in the eye of the consumer, which includes the launch of our 5% off every day discount offered to Lowe’s credit cardholders. We are differentiating our products and displays by working with our key vendor partners on new product development, new display techniques and technologies.  In addition, we are redirecting our focus from a product and vendor-centric view to a customer-centric view by pulling our inventory together for the customer in ways that help them buy all of the various products they need to complete the total project.  These near-term initiatives support the multi-year implementation of our broader strategic mission by pulling together the best combination of possibilities, support and value, whenever and wherever customers choose to engage.
 
 
 
15

 

OPERATIONS

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

 
Three Months Ended
   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period
 
 
July 29, 2011
   
July 30, 2010
   
2011 vs. 2010
   
2011 vs. 2010
 
Net sales
  100.00 %     100.00 %     N/A       1.3 %
Gross margin
  34.49       34.86       (37 )     0.2  
Expenses:
                             
Selling, general and administrative
  22.22       22.21       1       1.3  
Depreciation
  2.51       2.77       (26 )     (8.3 )
Interest - net
  0.62       0.59       3       7.0  
Total expenses
  25.35       25.57       (22 )     0.4  
Pre-tax earnings
  9.14       9.29       (15 )     (0.5 )
Income tax provision
  3.43       3.50       (7 )     (0.9 )
Net earnings
  5.71 %     5.79 %     (8 )     (0.2 )%
EBIT margin 1
  9.76 %     9.88 %     (12 )     - %
                               
 
Six Months Ended
   
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period
   
Percentage Increase / (Decrease) in Dollar Amounts from Prior Period
 
 
July 29, 2011
   
July 30, 2010
   
2011 vs. 2010
   
2011 vs. 2010
 
Net sales
  100.00 %     100.00 %     N/A       (0.1 )%
Gross margin
  34.93       35.01       (8 )     (0.3 )
Expenses:
                             
Selling, general and administrative
  23.76       23.49       27       1.1  
Depreciation
  2.76       2.97       (21 )     (7.4 )
Interest - net
  0.67       0.62       5       7.2  
Total expenses
  27.19       27.08       11       0.3  
Pre-tax earnings
  7.74       7.93       (19 )     (2.4 )
Income tax provision
  2.91       2.99       (8 )     (2.8 )
Net earnings
  4.83 %     4.94 %     (11 )     (2.2 )%
EBIT margin 1
  8.41 %     8.55 %     (14 )     (1.7 )%
 
 
 
16

 

   
Three Months Ended
   
Six Months Ended
 
Other Metrics
 
July 29, 2011
   
July 30, 2010
   
July 29, 2011
   
July 30, 2010
 
Comparable store sales (decrease) increase  2
    (0.3 ) %     1.6  %     (1.7 ) %     2.0  %
Total customer transactions (in millions)
    233       229       428       428  
Average ticket 3
  $ 62.44     $ 62.84     $ 62.47     $ 62.55  
At end of period:
                               
Number of stores
    1,753       1,724                  
Sales floor square feet (in millions)
    198       195                  
Average store size selling square feet (in thousands) 4
    113       113                  

 
1  EBIT margin, also referred to as operating margin, is defined as earnings before interest and taxes as a percentage of sales.
 
A comparable store is defined as a store that has been open longer than 13 months. A store that is identified for relocation is no longer considered comparable one month prior to its relocation. The relocated store must then remain open longer than 13 months to be considered comparable.
 
Average ticket is defined as net sales divided by the total number of customer transactions.
 
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.
 
Net Sales – Net sales increased 1.3% to $14.5 billion in the second quarter of 2011, driven by an increase in total customer count of 2.0% offset by a decrease in average ticket of 0.7%.  Comparable store sales decreased 0.3% over the same period, driven by a 0.9% decrease in comparable store average ticket resulting from lower sales in big-ticket categories, such as cabinets & countertops, millwork and appliances, offset by a 0.6% increase in comparable store customer count. The increase in customer count was driven primarily by sales of seasonal products combined with strong customer response to our 5% off discount offered to Lowe’s credit cardholders.

Performance was mixed across the country with results in the northeast and north central areas exceeding the company average as favorable weather helped drive spring projects after a tough winter of snow and ice storms. However, performance in the southern and gulf coast areas was lower than the company average as extreme heat and severe drought negatively impacted outdoor categories. We observed large regional swings in certain product categories, including nursery and lawn & landscape products, but most significantly in outdoor power equipment as unfavorable conditions along the gulf coast region drove lower comparable store sales compared to the northeast, north central and west.

During the quarter, we experienced comparable store sales increases above the company average in the following product categories: building materials, rough electrical, lawn & landscape products, nursery, tools, rough plumbing, paint, hardware, and seasonal living. Strong sales in asphalt roofing and installation services in the aftermath of severe storms that hit many regions of the country contributed to above-average comparable store sales in building materials.  Inflation also contributed to the above-average comparable store sales in building materials as well as in rough electrical.  Lawn & landscape products and nursery sales benefited as improved weather in the second quarter shifted sales of seasonal products from the first quarter.  In addition, tools experienced favorable comparable store sales driven by strong holiday promotions and the launch of our Kobalt® mechanics tools, which were designed with premium specifications to meet the demands of our commercial business customers.
 
Consumers continued to focus on smaller ticket items and projects during the quarter, which negatively impacted comparable store sales in cabinet & countertops, fashion plumbing and millwork.  Cabinets & countertops were also negatively impacted by clearance activities related to refreshing our stock cabinet product selection. Comparisons to prior year government stimulus programs, such as Cash for Appliances and energy tax credits, also led to comparable store sales performance below the company average in appliances and millwork.  In addition, sales in lumber were negatively impacted by deflation.
 

 
17

 

Gross Margin - For the second quarter of 2011, gross margin decreased 37 basis points as a percentage of sales, driven by 36 basis points of de-leverage in margin rate.  Margin rate was negatively impacted by promotional activity, the implementation of our 5% off every day discount for Lowe’s credit cardholders and clearance activity associated with product resets.  In addition, we experienced 15 basis points of de-leverage in distribution costs, driven primarily by increased fuel and ocean freight costs.  These were offset by 16 basis points of improvement in gross margin due to the mix of products sold across categories, primarily the result of a decreased proportion of sales in appliances and lumber.

The eight basis point decrease in gross margin as a percentage of sales for the first six months of 2011 compared to 2010 was primarily driven by de-leverage of 15 basis points in distribution expenses and seven basis points in markdowns associated with discontinued inventory offset by changes in product mix.

SG&A - For the second quarter of 2011, SG&A expense was relatively flat as a percentage of sales. SG&A expense leveraged 44 basis points associated with our proprietary credit card program due to reduced program costs associated with anticipated losses and a reduction in tender and other costs as more customers took advantage of our 5% off every day discount. SG&A expense also leveraged 35 basis points associated with bonus expense due to lower projected attainment levels. These were offset by de-leverage of approximately 50 basis points due to charges associated with asset impairments and discontinued projects, which included seven stores that were closed subsequent to the end of the quarter. We also experienced 15 basis points of de-leverage associated with internal and external staffing and technology expenditures related to investments made to improve customer experiences. In addition, we experienced de-leverage in store payroll expense due to a slight increase in hourly rates and new store openings.

The 27 basis point increase in SG&A as a percentage of sales for the first six months of 2011 compared to 2010 was driven by the same factors that impacted SG&A in the second quarter as well as de-leverage of approximately five basis points each in payroll taxes, insurance costs and fleet expense.

Depreciation Depreciation expense decreased 26 basis points compared to the second quarter of 2010 primarily due to a lower asset base resulting from decreased capital spending.  Property, less accumulated depreciation, totaled $22.2 billion at July 29, 2011 and $22.3 billion at July 30, 2010.  As of July 29, 2011 and July 30, 2010, we owned 89% and 88% of our stores, respectively, which includes stores on leased land.
 
Income Tax Provision - Our effective income tax rate was 37.5% and 37.6% for the three and six months ended July 29, 2011, respectively and 37.7% for the three and six months ended July 30, 2010.  Our effective income tax rate was 37.7% for fiscal 2010.
 
COMPANY OUTLOOK
 
Third Quarter

As of August 15, 2011, the date of our second quarter 2011 earnings release, we expected total sales to increase approximately 2% and comparable store sales to be approximately flat.  We expected average square footage growth of approximately 1.3%. Earnings before interest and taxes as a percentage of sales (operating margin) were expected to decrease 10 to 20 basis points, which included 20 to 30 basis points impact from additional expenses associated with seven stores that closed August 14, 2011.  In addition, depreciation expense was expected to be approximately $370 million.  Diluted earnings per share of $0.30 to $0.33 were expected for the third quarter, which included $0.01 to $0.02 per share impact from additional expenses associated with the seven stores that closed on August 14, 2011.  All comparisons are with the third quarter of fiscal 2010.

Fiscal 2011

As of August 15, 2011, the date of our second quarter 2011 earnings release, we expected total sales to increase approximately 2%, which included the 53rd week. The 53rd week was expected to increase total sales by approximately 1.4%.  We expected comparable store sales to decline approximately 1%.  We expected to open approximately 25 new stores during 2011, reflecting average square footage growth of approximately 1.3%. Earnings before interest and taxes as a percentage of sales (operating margin) were expected to decrease approximately 30 basis points, which included
 
 
18

 
 
approximately 25 basis points impact from impairment and store closing costs.  In addition, depreciation expense was expected to be approximately $1.5 billion.  Diluted earnings per share of $1.48 to $1.54 were expected for 2011, which included approximately $0.06 per share impact from impairment and store closing costs.  All comparisons are with fiscal 2010, a 52-week year.
 
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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 six months ended July 29, 2011 versus the six months ended July 30, 2010 was driven by changes in working capital, primarily related to accounts payable due to the timing of inventory purchases.  The decrease in net cash used in investing activities for the six months ended July 29, 2011 versus the six months ended July 30, 2010 was driven by decreased net purchase activity related to investments offset partially by an increase in cash used for property acquired due to corporate systems and store information technology investments. Net cash used in financing activities for the six months ended July 29, 2011 was primarily driven by share repurchases of $2.4 billion.  Net cash used in financing activities for the six months ended July 30, 2010 was primarily attributable to share repurchases of $1.0 billion, partially offset by the net of $1.0 billion in proceeds from the issuance of notes in April 2010 and the repayment of $500 million of notes that matured in June 2010.

Sources of Liquidity

In addition to our cash flows from operations, liquidity is provided by our short-term borrowing facilities.  We have a $1.75 billion senior credit facility that expires in June 2012.  We expect to renew the senior credit facility prior to its expiration in June 2012.  The senior credit facility supports our commercial paper program and has a $500 million letter of credit sublimit.  Amounts outstanding under letters of credit reduce the amount available for borrowing under the senior credit facility. Borrowings made are unsecured and are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the senior credit facility.  The senior credit facility contains certain restrictive covenants, which include maintenance of a debt leverage ratio as defined by the senior credit facility.  We were in compliance with those covenants at July 29, 2011.  Seventeen banking institutions are participating in the senior credit facility.  As of July 29, 2011, there were no outstanding borrowings or letters of credit under the senior credit facility and no outstanding borrowings under the commercial paper program.

We also have a Canadian dollar (C$) denominated credit facility in the amount of C$50 million that provides revolving credit support for our Canadian operations.  This uncommitted credit facility provides us with the ability to make unsecured borrowings which are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the credit facility.  As of July 29, 2011, there were no outstanding borrowings under the C$ credit facility.

We expect to continue to have access to the capital markets on both short 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 August 30, 2011, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds.  Although we currently do not expect a downgrade in our debt ratings, our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

Debt Ratings
S&P
Moody’s
Commercial Paper
A1
P1
Senior Debt
A
A1
Outlook
Stable
Negative
 
We believe that net cash provided by operating and financing activities will be adequate for our expansion plans and for our other operating requirements over the next 12 months.  There are no provisions in any agreements that would require  

 
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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 have a significant amount of cash held in foreign affiliates.
 
Cash Requirements
 
Capital Expenditures
 
Our fiscal 2011 capital expenditures forecast is approximately $2.1 billion, inclusive of approximately $100 million of lease commitments, resulting in planned net cash outflow of $2.0 billion. Approximately 35% of the planned net cash outflow is for store expansion. Our expansion plans for 2011 consist of approximately 25 new stores and are expected to increase average sales floor square footage by approximately 1.3%.  Further, approximately 95% of the 2011 projects are expected to be owned, which includes approximately 20% of the stores on leased land.  In addition, approximately 30% of the planned net cash outflow is for investment in our existing stores.  Other planned capital expenditures include investing in our distribution and corporate infrastructure, including enhancements in information technology.

Debt and Capital

We have a share repurchase program that is executed through purchases made from time to time in the open market or through private transactions.  Shares purchased under the share repurchase program are retired and returned to authorized and unissued status.  During the six months ended July 29, 2011, the Company utilized the remaining authorization existing under the share repurchase program. On August 19, 2011, the Company's Board of Directors authorized an additional $5.0 billion of share repurchases with no expiration.  The share repurchase program is further described in Note 7 to the consolidated financial statements (unaudited) and Item 2 of Form 10-Q included herein.