Lowe's 10-Q 2022-10-28

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 28, 2022

or

For the transition period from ______ to ______

Commission File Number 1-7898

LOWE’S COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

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. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

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

LOWE’S COMPANIES, INC.

- TABLE OF CONTENTS -

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FORWARD-LOOKING STATEMENTS

This Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements including words such as “believe”, “expect”, “anticipate”, “plan”, “desire”, “project”, “estimate”, “intend”, “will”, “should”, “could”, “would”, “may”, “strategy”, “potential”, “opportunity”, “outlook”, “scenario”, “guidance”, and similar expressions are forward-looking statements. Forward-looking statements involve, among other things, expectations, projections, and assumptions about future financial and operating results, objectives, business outlook, priorities, sales growth, shareholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for products and services, share repurchases, Lowe’s strategic initiatives, including those relating to acquisitions and dispositions and the impact of such transactions on our strategic and operational plans and financial results. Such statements involve risks and uncertainties and we can give no assurance that they will prove to be correct. Actual results may differ materially from those expressed or implied in such statements.

A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by these forward-looking statements including, but not limited to, changes in general economic conditions, such as volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of borrowing to Lowe’s and its customers, the risk that asset impairment and deal-related transaction costs on the divestiture of the Canadian retail business could ultimately be greater than what we currently expect, slower rates of growth in real disposable personal income that could affect the rate of growth in consumer spending, inflation and its impacts on discretionary spending and on our costs, shortages, and other disruptions in the labor supply, interest rate and currency fluctuations, home price appreciation or decreasing housing turnover, the availability of consumer credit and of mortgage financing, trade policy changes or additional tariffs, outbreaks of pandemics, fluctuations in fuel and energy costs, inflation or deflation of commodity prices, natural disasters, armed conflicts, acts of both domestic and international terrorism, and other factors that can negatively affect our customers.

Investors and others should carefully consider the foregoing factors and other uncertainties, risks and potential events including, but not limited to, those described in “Item 1A - Risk Factors” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in our most recent Annual Report on Form 10-K and as may be updated from time to time in our quarterly reports on Form 10-Q or other subsequent filings with the SEC. All such forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update these statements other than as required by law.

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Part I - FINANCIAL INFORMATION

Lowe’s Companies, Inc.

Consolidated Statements of Earnings (Unaudited)

In Millions, Except Per Share and Percentage Data

See accompanying notes to the consolidated financial statements (unaudited).

Lowe’s Companies, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

In Millions, Except Percentage Data

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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 nine months ended October 28, 2022, and October 29, 2021. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year 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 third quarter of 2022 increased 2.4% to $23.5 billion compared to net sales of $22.9 billion in the third quarter of 2021. The increase in total sales was driven by an increase in comparable sales. Net earnings in the third quarter of 2022 were $154 million compared to net earnings of $1.9 billion in the third quarter of 2022. Diluted earnings per common share were $0.25 in the third quarter of 2022 compared to $2.73 in the third quarter of 2021. Included in the third quarter of 2022 results is $2.1 billion of pre-tax long-lived asset impairment associated with the Canadian retail business, discussed further below, which decreased diluted earnings per share by $3.02. Excluding the impact of this item, adjusted diluted earnings per common share increased 19.8% to $3.27 in the third quarter of 2022 (see discussion of non-GAAP financial measures beginning on page 18).

For the first nine months of 2022, cash flows from operating activities were approximately $8.1 billion, while $1.1 billion was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, we repurchased $4.0 billion of common stock and paid $666 million in dividends during the three months ended October 28, 2022.

During the third quarter of 2022, comparable sales increased 2.2% with nine of 15 product categories generating positive comparable sales. We continued to experience broad-based demand from our Pro customers, which reflects the success of our Pro initiatives. In addition to our momentum with the Pro customer, we experienced improved Do-It-Yourself (DIY) customer performance during the quarter driven by project-related demand. Our positive comparable sales also reflect our disciplined pricing strategies to offset cost inflation.

While improving our operational productivity, we continue to invest in our hourly front-line associates. In the third quarter we awarded $200 million in bonuses, which are expected to be paid out before the holiday season, and announced an incremental investment of $170 million in permanent wage increases effective December 2022. In addition, during the quarter, we converted four geographic regions to our market-based delivery model for big and bulky product which improves the customer experience through expanded fulfillment options. We now have eight regions converted to the new model, which cover more than half of our stores, and we are on track to complete the roll-out by the end of next year.

On November 3, 2022, we announced that we entered into a definitive agreement to sell our Canadian retail business, which is expected to close in early calendar 2023. Although we have made progress in improving the Canadian retail business over the past few years, the performance has continued to lag our U.S. business operations. By executing this transaction, we will focus on further enhancing our operating margin, simplify our business model, and deliver sustainable value to our shareholders.

OPERATIONS

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

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

During the three months ended July 29, 2022, the Company adjusted its comparable sales metric to exclude days affected by national outages with its third-party credit and debit processor. Excluding these days, and the corresponding prior period days, increased comparable sales by approximately 10 basis points for the nine months ended October 28, 2022. The comparable sales metric for the three months ended October 28, 2022, and the three and nine months ended October 29, 2021 was not impacted or adjusted by similar outages.

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1 A comparable location is defined as a retail location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable in the month of its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. A location we decide to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Comparable sales are presented on a transacted basis when tender is accepted from a customer. Comparable sales include online sales, which impacted third quarter fiscal 2022 and fiscal 2021 comparable sales by approximately 80 basis points and 175 basis points, respectively, and year-to-date fiscal 2022 and fiscal 2021 comparable sales by approximately 45 basis points and 170 basis points, respectively. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week and 39-week periods.

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

3 Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period. The 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. As of October 28, 2022, return on invested capital was negatively impacted 590 basis points as a result of the long-lived asset impairment associated with the Canadian retail business. See below for additional information and reconciliations of non-GAAP measures.

Non-GAAP Financial Measures

Adjusted Diluted Earnings Per Share

Adjusted diluted earnings per share is considered a non-GAAP financial measure. The Company believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company’s core operating performance. Adjusted diluted earnings per share excludes the impact of a discrete item, further described below, not contemplated in the Company’s business outlook.

Fiscal 2022 Impacts

*•*In the third quarter of fiscal 2022, the Company recognized a pre-tax $2.1 billion long-lived asset impairment of the Canadian retail business (Canadian retail business transaction costs).

Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company’s diluted earnings per common share as prepared in accordance with GAAP. The Company’s methods of determining non-GAAP financial measures may differ from the method used by other companies and may not be comparable.

The following provides a reconciliation of the Company’s non-GAAP financial measure to the most directly comparable GAAP financial measure:

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

Return on Invested Capital

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

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

1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which was 27.9% and 24.7% for the periods ended October 28, 2022, and October 29, 2021, respectively.

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

3 As of October 28, 2022, return on invested capital was negatively impacted 590 basis points as a result of the long-lived asset impairment associated with the Canadian retail business.

Results of Operations

Net Sales – Net sales in the third quarter of 2022 increased 2.4% to $23.5 billion. The increase in total sales was primarily driven by a comparable sales increase. Comparable sales increased 2.2% over the same period, driven by a 8.0% increase in comparable average ticket, partially offset by a 5.8% decline in comparable customer transactions.

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During the third quarter of 2022, we experienced comparable sales increases in nine of 15 product categories, led by Building Materials, Rough Plumbing, and Lumber. Strength in these categories reflects broad-based demand from both the Pro customer and DIY customer, as well as unit price increases due to cost inflation. We experienced the lowest comparable sales in Lighting, Décor, and Seasonal & Outdoor Living in the quarter. Geographically, 12 of 15 U.S. regions experienced positive comparable sales, while our Canadian operations lagged the U.S.

Net sales decreased 0.4% to $74.6 billion for the first nine months of 2022 compared to 2021. Comparable sales declined 0.8% over the same period, driven by a 8.1% decline in comparable customer transactions, partially offset by a 7.3% increase in comparable average ticket.

Gross Margin – For the third quarter of 2022, gross margin as a percentage of sales increased 20 basis points. The gross margin increase for the quarter is driven by approximately 110 basis points of total rate improvement primarily in Lumber as we cycle significant deflation pressure in the prior year. The favorable rate improvement was partially offset by 35 basis points of deleverage from inventory shrink and 30 basis points of deleverage from higher transportation costs and expansion of our supply chain network.

Gross margin as a percentage of sales increased 10 basis points in the first nine months of 2022 compared to 2021. Gross margin was positively impacted by approximately 35 basis points of total rate improvement due to continued improvements in managing product costs and disciplined pricing strategies and 20 basis points of favorable product mix. These favorable impacts are partially offset by approximately 25 basis points of distribution costs and 20 basis points of deleverage from inventory shrink.

SG&A – For the third quarter of 2022, SG&A expense deleveraged 837 basis points as a percentage of sales compared to the third quarter of 2021. This was primarily driven by the long-lived asset impairment related to our Canadian retail business. This was partially offset by ongoing productivity initiatives.

SG&A expense as a percentage of sales deleveraged 228 basis points as a percentage of sales for the first nine months of 2022 compared to 2021 primarily due to the same factors that impacted SG&A for the third quarter.

Depreciation and Amortization – Depreciation and amortization deleveraged seven basis points as a percentage of sales for the third quarter of 2022 compared to 2021 due primarily to ongoing capital expenditures in core business investments.

Depreciation and amortization deleveraged 16 basis points as a percentage of sales for the first nine months of 2022 compared to 2021 primarily due to the same factors that impacted depreciation and amortization for the third quarter.

Interest – Net – Interest expense for the third quarter of 2022 deleveraged 28 basis points primarily due to interest expense related to the issuance of unsecured notes in March 2022 and September 2022, partially offset by scheduled payoff of notes at maturity.

Interest expense for the first nine months of 2022 deleveraged 21 basis points primarily due to the same factors that impacted interest expense for the third quarter.

Income Tax Provision – Our effective income tax rates were 75.5% and 26.1% for the three months ended October 28, 2022 and October 29, 2021, respectively, and 28.4% and 24.6% for the nine months ended October 28, 2022 and October 29, 2021, respectively. The unfavorable tax rate for the three and nine months ended October 28, 2022 compared to 2021 is largely driven by an increase in the valuation allowance for deferred taxes related to the long-lived asset impairment associated with RONA inc.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, and return excess cash to shareholders in the form of dividends and share repurchases. We believe these sources of liquidity will continue to support our business for the next twelve months. As of October 28, 2022, we held $3.2 billion of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities.

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Cash Flows Provided by Operating Activities

Cash flows from operating activities continued to provide the primary source of our liquidity. The decrease in net cash provided by operating activities for the nine months ended October 28, 2022, compared to the nine months ended October 29, 2021, was driven primarily by changes in working capital. Inventory decreased operating cash flows for the first nine months of 2022 by approximately $2.3 billion compared to a decrease of approximately $446 million for the first nine months of 2021, while accounts payable increased operating cash flows by $921 million for the first nine months of 2022, compared to an increase of $436 million for the first nine months of 2021. The increase in inventory and accounts payable is primarily due to product cost and freight inflation compared to the prior year, as well as lower inventory turns year-over-year. Deferred revenue decreased operating cash flows by $117 million for the first nine months of 2022, compared to an increase of $444 million for the first nine months of 2021. The decline in operating cash flow due to deferred revenue compared to the prior year is primarily due to an operational focus on customer fulfillment. Other operating liabilities also increased operating cash flows by $205 million during the first nine months of 2022, compared to a decrease of $421 million for the first nine months of 2021. This increase is primarily driven by the deferral of payment of our third quarter estimated federal tax payment under the income tax relief announced by the Internal Revenue Service for businesses located in states impacted by Hurricane Ian.

Cash Flows Used in Investing Activities

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

Capital expenditures

Our capital expenditures generally consist of investments in our strategic initiatives to enhance our ability to serve customers, improve existing stores, and support expansion plans. The following table provides our capital expenditures for the nine months ended October 28, 2022, and October 29, 2021:

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 up to $2.0 billion.

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Cash Flows Used in Financing Activities

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

Total Debt

During the nine months ended October 28, 2022, we issued $9.8 billion of unsecured notes, the proceeds of which were designated for general corporate purposes. During the nine months ended October 28, 2022, we also paid $760 million due to the scheduled payoff of notes at maturity.

Our commercial paper program is supported by the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement. The amount available to be drawn under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the Company’s commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as of October 28, 2022, and October 29, 2021. Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of October 28, 2022 was $4.0 billion.

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

The following table includes additional information related to our debt for the nine months ended October 28, 2022, and October 29, 2021:

Share Repurchases

We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions. We also withhold shares from employees to satisfy tax withholding liabilities. Shares repurchased are retired and returned to authorized and unissued status. The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total cash used to repurchase shares for the nine months ended October 28, 2022, and October 29, 2021:

As of October 28, 2022, we had $7.7 billion remaining available under our share repurchase program with no expiration date. We expect to repurchase shares totaling approximately $13.0 billion in 2022 (including the $12.1 billion repurchased during the first nine months of fiscal year 2022).

Dividends

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Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from $2.00 per share for the nine months ended October 29, 2021, to $2.65 per share for the nine months ended October 28, 2022.

Capital Resources

We expect to continue to have access to the capital markets on both a short-term and long-term basis when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of November 23, 2022, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. Our debt ratings have enabled, and should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets. Our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Long-Lived Asset Impairment

Description

We review the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. When evaluating long-lived assets for impairment, our asset group is generally at an individual location level, as that is the lowest level for which cash flows are identifiable. Cash flows for individual locations do not include an allocation of corporate overhead. During the three months ended October 28, 2022, the Company determined it was more likely than not that the assets within the Canadian retail business would be sold or otherwise disposed of significantly before the end of their previously estimated useful lives and were evaluated for recoverability. Based on the proposed transaction, the Company reconsidered the appropriate asset grouping of long-lived assets attributable to the Company’s Canadian locations given the change in the Company’s expectations regarding use and disposition of its associated assets. The Company determined the total Canada retail business (Canada asset group) to be the appropriate asset group for which Canadian business assets should be evaluated, as this represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Changes in asset group determinations are accounted for on a prospective basis.

A potential impairment has occurred if the fair value of the asset group is less than the asset group’s carrying value. The carrying value of the Canada asset group includes substantially all assets and liabilities of the Canadian retail business, including accounts receivable, inventory, property, operating and finance lease right-of-use assets, definite-lived intangible assets, operating liabilities including accounts payable and accrued compensation, and operating and finance lease liabilities. The cumulative foreign currency translation adjustment balance is excluded from the carrying value of the Canada asset group in evaluating the recoverability of a held and used asset group.

We use an income approach to determine the fair value of our individual operating locations, and a market approach to determine the fair value of our individual locations identified for sale or closure. A market approach of an orderly transaction under current market conditions was used in determining the estimated fair value of the Canada asset group, which was based on the proposed transaction price, inclusive of deferred consideration.

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Judgments and uncertainties involved in the estimate

Our impairment evaluations require us to apply judgment in determining whether an event or changes in circumstances indicate that an asset group’s carrying amount may not be recoverable, including the evaluation of whether it is more likely than not a location will be closed or an asset will be otherwise disposed of significantly before the end of its previously estimated useful life. Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin, and controllable expenses, assumptions about market performance, and estimated selling prices or lease rates for locations identified for closure.

Effect if actual results differ from assumptions

During the three months ended October 28, 2022, the Company recorded $2.1 billion of long-lived asset impairment within SG&A in the consolidated statements of earnings, which reflects the full carrying value of the long-lived assets of the Canada asset group. See Note 4 for additional information.

The Company is exposed to certain market risks, including changes in foreign currency exchange rates related to our international operations, interest rates, and commodity prices. The Company’s market risks have not changed materially from those disclosed in the Annual Report for the fiscal year ended January 28, 2022.

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” (as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of October 28, 2022, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended October 28, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – OTHER INFORMATION

Item 1. - Legal Proceedings

In addition to the matter referenced in our quarterly report on Form 10-Q for the quarterly period ended July 29, 2022, the Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position or cash flows. The Company maintains liability insurance for certain risks that are subject to certain self-insurance limits.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report filed with the SEC on March 21, 2022, which could materially affect our business, financial condition and operating results, as well as the following:

Our strategic transactions involve risks, and we may not realize the expected benefits because of numerous uncertainties and risks.

We regularly consider and enter into strategic transactions, including mergers, acquisitions, joint ventures, investments and other growth, market and geographic expansion strategies, with the expectation that these transactions will result in increases in sales, cost savings, synergies and other various benefits. Our ability to deliver the expected benefits from any strategic transaction is subject to numerous uncertainties and risks, including our ability to integrate personnel, labor models, financial, IT and other systems successfully; disruption of our ongoing business and distraction of management; hiring additional management and other critical personnel; and increasing the scope, geographic diversity and complexity of our operations. Effective internal controls are necessary to provide reliable and accurate financial reports, and the integration of businesses may create complexity in our financial systems and internal controls and make them more difficult to manage. Integration of businesses into our internal control system could cause us to fail to meet our financial reporting obligations. Additionally, any impairment of goodwill or other assets acquired or divested in a strategic transaction or charges to earnings associated with any strategic transaction, may materially reduce our earnings. For example, in connection with the preparation of the Company’s financial statements for the third quarter of 2022, the Company recorded pre-tax non-cash impairment of $2.1 billion related to the expected sale of its Canadian retail business, which reduced earnings for the third quarter of 2022. Our shareholders may react unfavorably to our strategic transactions. We may not realize the anticipated benefits from such transactions, including the full value of contingent payments associated with such transactions. We may be exposed to additional liabilities of any acquired business or joint venture, and we may be exposed to litigation in connection with the strategic transaction. Further, we may finance these strategic transactions by incurring additional debt, which could increase leverage or impact our ability to access capital in the future.

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Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases of the Company’s common stock on a trade date basis made during the three months ended October 28, 2022:

1**The total number of shares repurchased includes shares withheld from employees to satisfy either the exercise price of stock options or the statutory withholding tax liability upon the vesting of share-based awards.

2**On December 15, 2021, the Company announced that its Board of Directors authorized $13.0 billion of share repurchases under the program with no expiration.

3**In August 2022, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase the Company’s common stock. At inception, pursuant to the agreement, the Company paid $2.3 billion to the financial institution and received an initial delivery of 8.3 million shares. In October, prior to the end of the third quarter, the Company finalized the transaction and received an additional 3.3 million shares. The average price paid per share in settlement of the ASR agreement included in the table above was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. See Note 7 to the consolidated financial statements included herein for additional information regarding share repurchases.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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