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 and six months ended August 4, 2023, and July 29, 2022. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2023 (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 fiscal 2022. In fiscal 2023, there is a one week shift as a result of the 53rd week in fiscal 2022. For the purposes of the following discussion, comparable sales, comparable customer transactions, and comparable average ticket are based upon the comparable 13-week and 26-week periods from fiscal 2022. 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 second quarter of fiscal 2023 declined 9.2% to $25.0 billion compared to net sales of $27.5 billion in the second quarter of fiscal 2022. Prior year sales included $1.7 billion generated by our Canadian retail business, which was sold in the fourth quarter of fiscal 2022. Comparable sales for the second quarter of fiscal 2023 decreased 1.6%, consisting of a 1.9% decrease in comparable customer transactions, partially offset by a comparable average ticket increase of 0.3%. Net earnings in the second quarter of fiscal 2023 were $2.7 billion, which represents a decrease of 10.7% compared to the second quarter of fiscal 2022. Diluted earnings per common share were $4.56 in the second quarter of fiscal 2023 compared to $4.67 in the second quarter of fiscal 2022.

For the first six months of fiscal 2023, cash flows from operating activities were approximately $6.0 billion, with $765 million used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, we repurchased $2.2 billion of common stock and paid $624 million in dividends during the three months ended August 4, 2023.

Second quarter fiscal 2023 comparable sales declined 1.6%, driven by lumber commodity deflation and continued macroeconomic pressure affecting Do-It-Yourself (DIY) consumer discretionary spending. Despite lumber deflation, we experienced positive comparable sales growth with our Pro customers, which reflects the success of our expanded national and private brands, MVPs Pro Rewards and Partnership ProgramTM, and enhanced online capabilities.

We drove positive online comparable sales in the second quarter as we continue to improve our omnichannel experience. Our associates leverage our omnichannel investments, including mobile devices and order picking carts with mobile printers, to reduce picking time for online orders. For those customers seeking expedited delivery, we launched a new same-day delivery option nationwide for eligible orders placed on Lowes.com and our mobile app. This capability enables product to be delivered directly to Pro job sites and consumer homes within hours of ordering.

Also during the quarter, we expanded our rural framework to approximately 300 stores, including scaling our store-within-a-store concept with Petco®. Our work to optimize our rural stores is part of our broader localization strategy to drive market share gains and increase inventory productivity and operating margin.

The growth initiatives embedded in our Total Home strategy should enable us to grow market share, while navigating near-term market uncertainty. We also remain focused on improving productivity through our Perpetual Productivity Improvement (PPI) initiatives, which give us the agility to adapt and manage expenses through periods of unpredictable demand. We believe the combination of these growth and productivity initiatives in conjunction with our disciplined capital allocation strategy positions us to deliver meaningful long-term shareholder value.

15

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).

			Three Months Ended												Basis Point Increase/(Decrease) in Percentage of Net Sales from Prior Period						Percentage Increase/(Decrease) in Dollar Amounts from Prior Period
			August 4, 2023						July 29, 2022						2023 vs. 2022						2023 vs. 2022
Net sales			100.00		%				100.00		%				N/A						(9.2)		%
Gross margin			33.66						33.24						42						(8.0)
Expenses:
Selling, general and administrative			16.38						16.22						16						(8.3)
Depreciation and amortization			1.71						1.63						8						(4.9)
Operating income			15.57						15.39						18						(8.1)
Interest – net			1.36						0.96						40						29.2
Pre-tax earnings			14.21						14.43						(22)						(10.6)
Income tax provision			3.50						3.54						(4)						(10.3)
Net earnings			10.71		%				10.89		%				(18)						(10.7)		%

			Six Months Ended												Basis Point Increase/(Decrease) in Percentage of Net Sales from Prior Period						Percentage Increase/(Decrease) in Dollar Amounts from Prior Period
			August 4, 2023						July 29, 2022						2023 vs. 2022						2023 vs. 2022
Net sales			100.00		%				100.00		%				N/A						(7.5)		%
Gross margin			33.67						33.60						7						(7.3)
Expenses:
Selling, general and administrative			16.73						17.12						(39)						(9.7)
Depreciation and amortization			1.78						1.75						3						(5.9)
Operating income			15.16						14.73						43						(4.7)
Interest – net			1.45						0.99						46						35.9
Pre-tax earnings			13.71						13.74						(3)						(7.7)
Income tax provision			3.28						3.33						(5)						(8.7)
Net earnings			10.43		%				10.41		%				2						(7.4)		%

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 August 4, 2023, the Company adjusted its comparable sales metric to exclude days affected by national outages with its third-party credit and debit processor in the prior year. By excluding the days impacted by the outages, and the corresponding days in the comparable periods, comparable sales decreased by approximately 10 basis points and five basis points for the three and six months ended August 4, 2023, respectively, and increased by approximately 30 basis points and 10 basis points for the three and six months ended July 29, 2022, respectively.

						16

			Three Months Ended												Six Months Ended
Other Metrics			August 4, 2023						July 29, 2022						August 4, 2023						July 29, 2022
Comparable sales decrease 1			(1.6)		%				(0.3)		%				(2.9)		%				(2.1)		%
Total customer transactions (in millions)			244						268						458						494
Average ticket 2			$	102.35					$	102.45					$	103.33					$	103.41
At end of period:
Number of stores			1,742						1,969
Sales floor square feet (in millions)			195						208
Average store size selling square feet (in thousands) 3			112						106
Net earnings to average debt and shareholders’ deficit 4			23.7		%				31.4		%
Return on invested capital 4			27.8		%				34.5		%

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. Operating locations which are sold are included in comparable sales until the date of sale. Comparable sales are presented on a transacted basis when tender is accepted from a customer. Comparable sales include online sales, which impacted second quarter fiscal 2023 and fiscal 2022 comparable sales by approximately 70 basis points and 55 basis points, respectively, and year-to-date fiscal 2023 and fiscal 2022 comparable sales by approximately 65 basis points and 25 basis points, respectively. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week and 26-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 is the most comparable GAAP ratio. As of August 4, 2023, return on invested capital was negatively impacted 750 basis points as a result of the sale of the Canadian retail business. See below for additional information and reconciliations of non-GAAP measures.

Non-GAAP Financial Measures

Return on Invested Capital

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

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

17

			For the Periods Ended
(In millions, except percentage data)			August 4, 2023						July 29, 2022
Calculation of Return on Invested Capital
Numerator
Net Earnings			$	6,044					$	8,427
Plus:
Interest expense – net			1,305						966
Operating lease interest			158						159
Provision for income taxes			2,452						2,776
Lease adjusted net operating profit			9,959						12,328
Less:
Income tax adjustment 1			2,874						3,055
Lease adjusted net operating profit after tax			$	7,085					$	9,273
Denominator
Average debt and shareholders’ deficit 2			$	25,504					$	26,849
Net earnings to average debt and shareholders’ deficit			23.7		%				31.4		%
Return on invested capital 3			27.8		%				34.5		%

1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which was 28.9% and 24.8% for the periods ended August 4, 2023, and July 29, 2022, respectively.

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

3 For the period ended August 4, 2023, return on invested capital was negatively impacted 750 basis points as a result of the sale of the Canadian retail business.

Results of Operations

Net Sales – Net sales in the second quarter of 2023 decreased 9.2% to $25.0 billion. The decrease in total sales was primarily driven by the sale of the Canadian retail business in fiscal 2022, which generated $1.7 billion of net sales in the second quarter of 2022. Comparable sales declined 1.6% over the same period, consisting of a 1.9% decline in comparable customer transactions, partially offset by a 0.3% increase in comparable average ticket. Total sales also declined approximately $335 million due to the timing shift in our fiscal calendar, in which the second quarter of fiscal 2023 (a 52-week year) included one less week of spring and one more week of summer than fiscal 2022 (a 53-week year).

During the second quarter of 2023, we experienced comparable sales increases in six of 14 product categories, led by Building Materials, Lawn & Garden, and Seasonal & Outdoor Living. Strength in Building Materials reflects continued growth with our Pro customers. Lawn & Garden and Seasonal & Outdoor Living benefited from delayed seasonal sales from the first quarter due to the late start to spring weather. Although our lowest comparable sales were in Lumber due to significant commodity deflation, the highest unit sales increases were also in this category, demonstrating strong Pro customer demand.

Net sales decreased 7.5% to $47.3 billion for the first six months of 2023 compared to 2022. The decrease in total sales was primarily driven by the sale of the Canadian retail business in fiscal 2022, which generated $2.9 billion of net sales in the first six months of 2022. Comparable sales also declined 2.9% over the same period, driven by a 2.9% decline in comparable customer transactions, while comparable average ticket was flat.

Gross Margin – For the second quarter of 2023, gross margin as a percentage of sales increased 42 basis points. The gross margin increase for the quarter is driven by lower transportation costs, favorable product mix, and productivity initiatives, partially offset by higher costs associated with the expansion of our supply chain network.

Gross margin as a percentage of sales increased seven basis points in the first six months of 2023 compared to 2022 primarily due to the same factors that impacted gross margin for the second quarter.

						18

SG&A – For the second quarter of 2023, SG&A expense deleveraged 16 basis points as a percentage of sales compared to the second quarter of 2022 primarily due to fixed cost pressure compared to lower sales, which was partially offset by the benefit of a legal settlement.

SG&A expense as a percentage of sales leveraged 39 basis points as a percentage of sales for the first six months of 2023 compared to 2022 primarily due to legal settlements and the gain on contingent consideration associated with the fiscal 2022 sale of the Canadian retail business, partially offset by fixed cost pressure compared to lower sales.

Depreciation and Amortization – Depreciation and amortization deleveraged eight basis points as a percentage of sales for the second quarter of 2023 compared to 2022.

Depreciation and amortization deleveraged three basis points as a percentage of sales for the first six months of 2023 compared to 2022.

Interest – Net – Net interest expense for the second quarter of 2023 deleveraged 40 basis points primarily due to interest expense related to the issuance of unsecured notes over the past year, partially offset by interest income on our cash equivalents and short-term investments.

Net interest expense for the first six months of 2023 deleveraged 46 basis points primarily due to the same factors that impacted interest expense for the second quarter.

Income Tax Provision – Our effective income tax rates were 24.6% and 24.5% for the three months ended August 4, 2023 and July 29, 2022, respectively, and 23.9% and 24.2% for the six months ended August 4, 2023 and July 29, 2022, 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 August 4, 2023, we held $3.5 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

			Six Months Ended
(In millions)			August 4, 2023						July 29, 2022
Net cash provided by operating activities			$	5,968					$	6,012

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 six months ended August 4, 2023, compared to the six months ended July 29, 2022, was driven primarily by timing of income tax payments and a decline in net earnings, partially offset by changes in working capital. Other operating liabilities decreased operating cash flows by $1.4 billion during the first six months of fiscal 2023. This decrease is primarily driven by the payment of our third and fourth quarter fiscal 2022 estimated federal tax payments that were deferred until the first quarter of fiscal 2023 under the income tax relief announced by the Internal Revenue Service for businesses located in states impacted by Hurricane Ian. Inventory increased operating cash flows by approximately $1.1 billion. Inventory declined in the current year as we continue to manage inventory replenishment in line with sales trends.

Cash Flows Used in Investing Activities

			Six Months Ended
(In millions)			August 4, 2023						July 29, 2022
Net cash used in investing activities			$	(715)					$	(709)

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

19

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 six months ended August 4, 2023, and July 29, 2022:

			Six Months Ended
(In millions)			August 4, 2023						July 29, 2022
Existing store investments 1			$	570					$	495
Strategic initiatives 2			170						103
New stores and corporate facilities 3			25						89
Total capital expenditures			$	765					$	687

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.

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

For fiscal 2023, our guidance for capital expenditures is up to $2.0 billion.

Cash Flows Used in Financing Activities

			Six Months Ended
(In millions)			August 4, 2023						July 29, 2022
Net cash used in financing activities			$	(3,107)					$	(4,954)

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

Total Debt

During the six months ended August 4, 2023, we issued $3.0 billion of unsecured notes, the proceeds of which were designated for general corporate purposes.

Our commercial paper program is supported by the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement. The amounts available to be drawn under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement are reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under our commercial paper program, 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as of August 4, 2023. Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of August 4, 2023 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 August 4, 2023.

The following table includes additional information related to our debt for the six months ended August 4, 2023, and July 29, 2022:

			Six Months Ended
(In millions)			August 4, 2023						July 29, 2022
Net proceeds from issuance of debt			$	2,983					$	4,964
Repayment of debt			(45)						(799)
Net change in commercial paper			(499)						—
Maximum commercial paper outstanding at any period			2,195						1,361

						20

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 six months ended August 4, 2023, and July 29, 2022:

			Six Months Ended
(In millions, except per share data)			August 4, 2023						July 29, 2022
Total amount paid for share repurchases			$	4,356					$	8,128
Total number of shares repurchased			21.0						40.7
Average price paid per share			$	207.60					$	199.61

As of August 4, 2023, we had $16.6 billion remaining available under our share repurchase program with no expiration date.

Dividends

Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from $1.60 per share for the six months ended July 29, 2022, to $2.10 per share for the six months ended August 4, 2023.

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 August 30, 2023, 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.

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.