Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

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 months ended April 29, 2022, and April 30, 2021. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2022 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Unless otherwise specified, all comparisons made are to the corresponding period of 2021. This discussion and analysis is presented in four sections:

• Executive Overview

• Operations

• Financial Condition, Liquidity and Capital Resources

• Critical Accounting Policies and Estimates

EXECUTIVE OVERVIEW

Net sales in the first quarter of 2022 decreased 3.1% to $23.7 billion compared to net sales of $24.4 billion in the first quarter of 2021. The decrease in total sales was driven by a decrease in comparable sales. Net earnings in the first quarter of 2022 were $2.3 billion, which represents an increase of 0.5% compared to the first quarter of 2021. Diluted earnings per common share increased 9.4% to $3.51 in the first quarter of 2022 from $3.21 in the first quarter of 2021.

For the first three months of 2022, cash flows from operating activities were approximately $3.0 billion, while $343 million was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, we repurchased $4.1 billion of common stock and paid $537 million in dividends during the three months ended April 29, 2022.

During the first quarter of 2022, comparable sales declined 4.0% with seven of 15 product categories generating positive comparable sales during the quarter. In the first quarter, our spring-related outdoor categories were unfavorably impacted by a delayed spring selling season across all regions, which was most pronounced in the North, due to unseasonably cold and wet weather. However, we continued to experience strong results with our Pro customers, particularly in our Building Products categories, due to our improved Pro product and service offerings, as well as strong market demand. In addition, DIY demand remains solid for core, non-seasonal home improvement projects. Despite the delay in spring, the operational efficiencies gained through our Perpetual Productivity Improvement (PPI) initiatives, such as our enhanced labor management tools and improved pricing capabilities, have given us the agility to deliver operating margin improvement even when sales decline.

This quarter, we launched our new Pro Loyalty program, MVPs Pro Rewards and Partnership ProgramTM, which is centered around creating a partnership with our Pro customers. We are excited about the loyalty and credit offerings our MVPs program provides, and we look forward to building on the momentum of the program as we launch enhanced features in the coming months. In addition, during the quarter, we converted our fourth geographic area to our market-based delivery model for big and bulky product. In this model, product flows directly to customer homes from our distribution network, bypassing stores altogether.

We view spring as a first half event, and we are encouraged by the arrival of spring across our regions at the close of the first quarter. As part of our Total Home strategy, we are ready to capitalize on this demand with our enhanced assortment, strong inventory position, improved omnichannel fulfillment capabilities, and seasonal staffing in place to serve customers and grow market share.

OPERATIONS

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

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			Three Months Ended												Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Period						Percentage Increase / (Decrease) in Dollar Amounts from Prior Period
			April 29, 2022						April 30, 2021						2022 vs. 2021						2022 vs. 2021
Net sales			100.00		%				100.00		%				N/A						(3.1)		%
Gross margin			34.03						33.29						74						(1.0)
Expenses:
Selling, general and administrative			18.19						18.40						(21)						(4.3)
Depreciation and amortization			1.88						1.60						28						13.8
Operating income			13.96						13.29						67						1.8
Interest – net			1.03						0.87						16						15.4
Pre-tax earnings			12.93						12.42						51						0.8
Income tax provision			3.07						2.92						15						1.9
Net earnings			9.86		%				9.50		%				36						0.5		%

The following table sets forth key metrics utilized by management in assessing business performance. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited).

			Three Months Ended
Other Metrics			April 29, 2022						April 30, 2021
Comparable sales (decrease)/increase 1			(4.0)		%				25.9		%
Total customer transactions (in millions)			226						261
Average ticket 2			$	104.52					$	93.74
At end of period:
Number of stores			1,971						1,972
Sales floor square feet (in millions)			208						208
Average store size selling square feet (in thousands) 3			106						105
Net earnings to average debt and shareholders’ (deficit)/equity 4			30.8		%				24.3		%
Return on invested capital 4			33.8		%				29.9		%

1 A comparable location is defined as a retail location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable in the month of its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. A location we decide to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Comparable sales are presented on a transacted basis when tender is accepted from a customer. Comparable sales include online sales, which impacted first quarter fiscal 2022 and fiscal 2021 comparable sales by approximately -5 basis points and 310 basis points, respectively. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week periods.

2 Average ticket is defined as net sales divided by the total number of customer transactions.

3 Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period. The average Lowe’s-branded home improvement store has approximately 112,000 square feet of retail selling space.

4 Return on invested capital is calculated using a non-GAAP financial measure. Net earnings to average debt and shareholders’ (deficit)/equity is the most comparable GAAP ratio. See below for additional information and reconciliations of non-GAAP measures.

Non-GAAP Financial Measures

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Return on Invested Capital

Return on Invested Capital (ROIC) is calculated using a non-GAAP financial measure. Management believes ROIC is a meaningful metric for analysts and investors as a measure of how effectively the Company is using capital to generate profits. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management may differ from the methods used by other companies. We encourage you to understand the methods used by another company to calculate ROIC before comparing its ROIC to ours.

We define ROIC as the rolling 12 months’ lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and shareholders’ (deficit)/equity. Lease adjusted NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure. The calculation of ROIC, together with a reconciliation of net earnings to Lease adjusted NOPAT, is as follows:

			For the Periods Ended
(In millions, except percentage data)			April 29, 2022						April 30, 2021
Calculation of Return on Invested Capital
Numerator
Net Earnings			$	8,453					$	6,819
Plus:
Interest expense – net			918						855
Loss on extinguishment of debt			—						1,060
Operating lease interest			158						168
Provision for income taxes			2,780						2,167
Lease adjusted net operating profit			12,309						11,069
Less:
Income tax adjustment 1			3,046						2,670
Lease adjusted net operating profit after tax			$	9,263					$	8,399
Denominator
Average debt and shareholders’ (deficit)/equity 2			$	27,442					$	28,053
Net earnings to average debt and shareholders’ (deficit)/equity			30.8		%				24.3		%
Return on invested capital			33.8		%				29.9		%

1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which was 24.7% and 24.1% for the periods ended April 29, 2022, and April 30, 2021, respectively.

2 Average debt and shareholders’ (deficit)/equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total shareholders’ (deficit)/equity.

Results of Operations

Net Sales – Net sales for the first quarter of 2022 decreased 3.1% to $23.7 billion. The decrease in total sales was driven by a decline in comparable sales. Comparable sales decreased 4.0% over the same period, driven by a 13.1% decrease in comparable customer transactions, partially offset by a 9.1% increase in comparable average ticket.

During the first quarter of 2022, we experienced comparable sales increases in seven of 15 product categories, led by Electrical, Building Materials, and Rough Plumbing. Strength in these categories reflects robust Pro customer demand, as well as unit price increases due to inflation. Our seasonal categories of Seasonal & Outdoor Living and Lawn & Garden experienced our lowest comparable sales change due to a delayed spring season, with unseasonably cool and wet weather across all regions.

Gross Margin – For the first quarter of 2022, gross margin increased 74 basis points as a percentage of sales. The gross margin increase for the quarter is driven by approximately 50 basis points of total rate improvement due to continued improvements in managing product costs and disciplined pricing strategies, 25 basis points of leverage from higher credit revenue, and 20 basis points of favorable product mix. These favorable impacts were partially offset by 10 basis points of deleverage from damaged live-goods caused by unseasonable weather and 10 basis points of deleverage from distribution costs.

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SG&A – For the first quarter of 2022, SG&A expense leveraged 21 basis points as a percentage of sales compared to the first quarter of 2021. This is primarily driven by improved labor productivity, partially offset by lower fixed cost leverage and wage pressure.

Depreciation and Amortization – Depreciation and amortization deleveraged 28 basis points for the first quarter of 2022 compared to the prior year primarily due to ongoing capital investments in technology, store environment, and store equipment. Property, less accumulated depreciation, decreased to $18.9 billion at April 29, 2022, compared to $19.1 billion at April 30, 2021.

Interest – Net – Interest expense for the first quarter of 2022 deleveraged 16 basis points as a percentage of sales, primarily due to interest expense related to the issuance of unsecured notes in March 2021, September 2021, and March 2022, partially offset by scheduled payoff of notes at maturity.

Income Tax Provision – Our effective income tax rates were 23.7% and 23.5% for the three months ended April 29, 2022 and April 30, 2021, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, and return excess cash to shareholders in the form of dividends and share repurchases. We believe these sources of liquidity will continue to support our business for the next twelve months. As of April 29, 2022, we held $3.4 billion of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities.

Cash Flows Provided by Operating Activities

			Three Months Ended
(In millions)			April 29, 2022						April 30, 2021
Net cash provided by operating activities			$	2,977					$	4,492

Cash flows from operating activities continued to provide the primary source of our liquidity. The decrease in net cash provided by operating activities for the three months ended April 29, 2022, compared to the three months ended April 30, 2021, was driven primarily by changes in working capital. Accounts payable increased by $2.5 billion for the first three months of 2022 compared to an increase of $3.1 billion for the first three months of 2021, driving a net difference in operating cash flows for the quarter of $523 million. Inventory decreased operating cash flows for the first three months of 2022 by approximately $2.6 billion compared to a decrease of approximately $2.1 billion for the first three months of 2021. We typically build our inventory in anticipation for spring as we have historically recognized our highest volume sales during the second fiscal quarter. In the current year, we have experienced a delay in the spring selling season due to unseasonably cool and wet weather which has resulted in elevated inventory levels in our seasonal categories. Other operating liabilities increased $81 million for the first three months of 2022 compared to an increase of $421 million in the first three months of 2021. The decline in cash flows provided by the change in other operating liabilities in the current year compared to the prior year is primarily driven by the payout of discretionary compensation for front-line employees in the first quarter of fiscal 2022.

Cash Flows Used in Investing Activities

			Three Months Ended
(In millions)			April 29, 2022						April 30, 2021
Net cash used in investing activities			$	(310)					$	(477)

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

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Capital expenditures

Our capital expenditures generally consist of investments in our strategic initiatives to enhance our ability to serve customers, improve existing stores, and support expansion plans. The following table provides our capital expenditures for the three months ended April 29, 2022, and April 30, 2021:

			Three Months Ended
(In millions)			April 29, 2022						April 30, 2021
Core business investments 1			$	252					$	365
Strategic initiatives 2			46						58
New stores, new corporate facilities and international 3			45						38
Total capital expenditures			$	343					$	461

1**Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts.

2**Represents investments related to our strategic focus areas aimed at improving customers’ experience and driving improved performance in the near and long term (excluding acquisitions).

3**Represents expenditures primarily related to land purchases, buildings, and personal property for new store projects and new corporate facilities projects, as well as expenditures related to our international operations.

Our fiscal year 2022 outlook for capital expenditures is approximately $2.0 billion.

Cash Flows Used in Financing Activities

			Three Months Ended
(In millions)			April 29, 2022						April 30, 2021
Net cash used in financing activities			$	(386)					$	(2,020)

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

Total Debt

During the three months ended April 29, 2022, we issued $5.0 billion of unsecured notes, the proceeds of which were designated for general corporate purposes. During the three months ended April 29, 2022, we also paid $750 million to retire scheduled debt at maturity.

The 2020 Credit Agreement and the Third Amended and Restated Credit Agreement support our commercial paper program. The amount available to be drawn under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the Company’s commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as of April 29, 2022, and April 30, 2021. Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of April 29, 2022, was $4.0 billion.

The 2020 Credit Agreement and the Third Amended and Restated Credit Agreement contain customary representations, warranties, and covenants. We were in compliance with those covenants at April 29, 2022.

The following table includes additional information related to our debt for the three months ended April 29, 2022, and April 30, 2021:

			Three Months Ended
(In millions)			April 29, 2022						April 30, 2021
Net proceeds from issuance of debt			$	4,964					$	1,988
Repayment of debt			(773)						(543)
Maximum commercial paper outstanding at any period			1,361						400

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Share Repurchases

We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions. We also withhold shares from employees to satisfy tax withholding liabilities. Shares repurchased are retired and returned to authorized and unissued status. The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total cash used to repurchase shares for the three months ended April 29, 2022, and April 30, 2021:

			Three Months Ended
(In millions, except per share data)			April 29, 2022						April 30, 2021
Total amount paid for share repurchases			$	4,037					$	3,038
Total number of shares repurchased			18.7						16.7
Average price paid per share			$	215.32					$	182.20

As of April 29, 2022, we had $15.7 billion remaining available under our share repurchase program with no expiration date. We expect to repurchase shares totaling approximately $12.0 billion in 2022 (including the amount repurchased during the first three months of fiscal year 2022).

Dividends

Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from $0.60 per share for the three months ended April 30, 2021, to $0.80 per share for the three months ended April 29, 2022.

Capital Resources

We expect to continue to have access to the capital markets on both a short-term and long-term basis when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of May 26, 2022, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. Our debt ratings have enabled, and should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets. Our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

Debt Ratings			S&P			Moody’s
Commercial Paper			A-2			P-2
Senior Debt			BBB+			Baa1
Senior Debt Outlook			Stable			Stable

There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price. In addition, we do not believe it will be necessary to repatriate significant cash and cash equivalents and short-term investments held in foreign affiliates to fund domestic operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. Our significant and critical accounting policies and estimates have not changed significantly since the filing of the Annual Report.