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 2, 2024, and August 4, 2023. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2024 (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 2023. 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

The following table highlights our financial results:

			Three Months Ended												Six Months Ended
(in millions, except per share data)			August 2, 2024						August 4, 2023						August 2, 2024						August 4, 2023
Net sales			$	23,586					$	24,956					$	44,950					$	47,304
Net earnings			2,383						2,673						4,137						4,933
Diluted earnings per share			4.17						4.56						7.23						8.32
Net cash provided by operating activities															$	7,415					$	5,968
Capital expenditures															808						765
Repurchases of common stock1															1,756						4,333
Cash dividend payments															1,262						1,257

1 Repurchases of common stock on a trade-date basis.

Net sales in the second quarter of fiscal 2024 declined 5.5% to $23.6 billion compared to net sales of $25.0 billion in the second quarter of fiscal 2023. Comparable sales for the second quarter of fiscal 2024 decreased 5.1%, consisting of a 5.9% decrease in comparable customer transactions, partially offset by an increase of 0.8% in comparable average ticket. Net earnings in the second quarter of fiscal 2024 were $2.4 billion, compared to net earnings of $2.7 billion in the second quarter of fiscal 2023. Diluted earnings per common share were $4.17 in the second quarter of fiscal 2024 compared to $4.56 in the second quarter of fiscal 2023. Included in the second quarter of 2024 results was pre-tax income of $43 million consisting of a realized gain on the contingent consideration associated with the fiscal 2022 sale of the Canadian retail business, which increased diluted earnings per common share by $0.07. Excluding the impact of this item, adjusted diluted earnings per common share was $4.10 in the second quarter of 2024 (see the non-GAAP financial measures discussion).

For the first six months of fiscal 2024, cash flows from operating activities were approximately $7.4 billion, with $808 million used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, during the three months ended August 2, 2024, we repurchased $1.0 billion of common stock and paid $629 million in dividends.

Second quarter fiscal 2024 comparable sales declined 5.1% driven by continued softness in Do-It-Yourself (DIY) demand and unfavorable weather adversely impacting sales in seasonal and other outdoor categories. These pressures were partially offset by positive comparable sales with our Pro customers and online, demonstrating the importance of our ongoing investments in our Total Home strategy and the success of our expanded omnichannel fulfillment offerings.

Despite prolonged sales pressure this quarter, we delivered strong operating performance and disciplined expense management across the Company due to our continued progress of our Perpetual Productivity Improvement (PPI) initiatives. These PPI initiatives give us the agility to adapt and manage expenses in line with sales trends.

While the near-term macroeconomic environment remains uncertain, the core medium-to-long-term drivers of our business are strong: home price appreciation, disposable personal income, and aging housing stock. We also expect that current generational

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trends will be supportive of home improvement demand over the long-term. Wee believe we are well-positioned for market share growth when the home improvement market recovers. In the meantime, we plan to invest in technology and innovation as part of our Total Home strategy, while maintaining operational discipline.

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						Six Months Ended												Basis Point Increase/(Decrease) in Percentage of Net Sales
			August 2, 2024						August 4, 2023									August 2, 2024						August 4, 2023
Net sales			100.00		%				100.00		%				N/A						100.00		%				100.00		%				N/A
Gross margin			33.47						33.66						(19)						33.34						33.67						(33)
Expenses:
Selling, general and administrative			17.07						16.38						69						17.88						16.73						115
Depreciation and amortization			1.79						1.71						8						1.89						1.78						11
Operating income			14.61						15.57						(96)						13.57						15.16						(159)
Interest – net			1.34						1.36						(2)						1.49						1.45						4
Pre-tax earnings			13.27						14.21						(94)						12.08						13.71						(163)
Income tax provision			3.17						3.50						(33)						2.88						3.28						(40)
Net earnings			10.10		%				10.71		%				(61)						9.20		%				10.43		%				(123)

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												Six Months Ended
Other Metrics			August 2, 2024						August 4, 2023						August 2, 2024						August 4, 2023
Comparable sales decrease 1			(5.1)		%				(1.6)		%				(4.6)		%				(2.9)		%
Total customer transactions (in millions)			230						244						437						458
Average ticket 2			$	102.71					$	102.35					$	102.82					$	103.33
At end of period:
Number of stores			1,746						1,742
Sales floor square feet (in millions)			195						195
Average store size selling square feet (in thousands) 3			112						112
Net earnings to average debt and shareholders’ deficit			26.5		%				23.7		%
Return on invested capital 4			30.9		%				27.8		%

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 positively impacted second quarter fiscal 2024 and fiscal 2023 comparable sales by approximately 30 basis points and 70 basis points, respectively, and year-to-date fiscal 2024 and fiscal 2023 sales by approximately 20 basis points and 65 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.

4 Return on invested capital is calculated using a non-GAAP financial measure. See below for additional information and reconciliations of non-GAAP measures.

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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 understanding the comparison of operational performance for fiscal 2024. Adjusted diluted earnings per share excludes the impact of a certain item, further described below, not contemplated in the Company’s business outlook for fiscal 2024. There were no non-GAAP adjustments to diluted earnings per share for the three months ended August 4, 2023.

Fiscal 2024 Impacts

*•*In the second quarter of fiscal 2024, the Company recognized pre-tax income of $43 million consisting of a realized gain on the contingent consideration associated with the fiscal 2022 sale of the Canadian retail business (Canadian retail business transaction).

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.

			Three Months Ended
			August 2, 2024
			Pre-Tax Earnings						Tax****1						Net Earnings
Diluted earnings per share, as reported															$	4.17
Non-GAAP adjustments – per share impacts
Canadian retail business transaction			(0.07)						—						(0.07)
Adjusted diluted earnings per share															$	4.10

1 Represents the corresponding tax benefit or expense specifically 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. 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:

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			For the Periods Ended
(In millions, except percentage data)			August 2, 2024						August 4, 2023
Calculation of Return on Invested Capital
Numerator
Net Earnings			$	6,931					$	6,044
Plus:
Interest expense – net			1,361						1,305
Operating lease interest			169						158
Provision for income taxes			2,191						2,452
Lease adjusted net operating profit			10,652						9,959
Less:
Income tax adjustment1			2,559						2,874
Lease adjusted net operating profit after tax			$	8,093					$	7,085
Denominator
Average debt and shareholders’ deficit2			$	26,160					$	25,504
Net earnings to average debt and shareholders’ deficit			26.5		%				23.7		%
Return on invested capital****3			30.9		%				27.8		%

1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which was 24.0% and 28.9% for the periods ended August 2, 2024, and August 4, 2023, 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 2024 decreased 5.5% to $23.6 billion. Comparable sales declined 5.1%, consisting of a 5.9% decline in comparable customer transactions, partially offset by a 0.8% increase in comparable average ticket.

During the second quarter of 2024, we experienced growth in Building Materials and performance above company average in Rough Plumbing, Electrical, and Millwork which reflect continued strong demand with the Pro customer. Comparable sales in Appliances also exceeded the company average as we continue to be an industry leader in this category.

Net sales decreased 5.0% to $45.0 billion for the first six months of 2024 compared to 2023. Comparable sales also declined 4.6% over the same period, driven by a 4.6% decline in comparable customer transactions, while comparable average ticket was flat.

Gross Margin – For the second quarter of 2024, gross margin as a percentage of sales decreased 19 basis points. The gross margin contraction for the quarter is driven by higher costs associated with investments in our supply chain, partially offset by lower transportation costs and ongoing PPI initiatives.

Gross margin as a percentage of sales decreased 33 basis points in the first six months of 2024 compared to 2023, primarily due to the same factors that impacted gross margin for the second quarter, as well as a decline in credit revenue.

SG&A – For the second quarter of 2024, SG&A expense deleveraged 69 basis points as a percentage of sales compared to the second quarter of 2023, primarily due to cycling the prior year favorable legal settlement and lower sales, partially offset by the current year gain on contingent consideration associated with the fiscal 2022 sale of the Canadian retail business and our ongoing PPI initiatives to manage expenses in-line with sales trends.

SG&A expense as a percentage of sales deleveraged 115 basis points as a percentage of sales for the first six months of 2024 compared to 2023, primarily due to the same factors that impacted gross margin for the second quarter.

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Depreciation and Amortization – Depreciation and amortization deleveraged eight basis points as a percentage of sales for the second quarter of 2024 compared to 2023.

Depreciation and amortization deleveraged 11 basis points as a percentage of sales for the first six months of 2024 compared to 2023.

Interest – Net – Net interest expense for the second quarter of 2024 leveraged two basis points as a percentage of sales.

Net interest expense for the first six months of 2024 deleveraged four basis points as a percentage of sales.

Income Tax Provision – Our effective income tax rates were 23.9% and 24.6% for the three months ended August 2, 2024 and August 4, 2023, respectively, and 23.8% and 23.9% for the six months ended August 2, 2024 and August 4, 2023, 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, return excess cash to shareholders in the form of dividends and share repurchases, and repay debt maturities as they become due. We believe these sources of liquidity will continue to support our business for the next twelve months. As of August 2, 2024, we held $4.4 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

			Six Months Ended
(In millions)			August 2, 2024						August 4, 2023
Net cash provided by operating activities			$	7,415					$	5,968

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 August 2, 2024, compared to the six months ended August 4, 2023, was primarily driven by timing of prior year income tax payments and other changes in working capital, partially offset by lower net earnings. Cash flows relating to changes in other operating liabilities improved $1.4 billion driven by the first quarter of fiscal 2023 payment of our third and fourth quarter fiscal 2022 estimated federal tax payments that were deferred under the income tax relief announced by the Internal Revenue Service for businesses located in states impacted by Hurricane Ian. In addition, cash flows relating to changes in inventory and accounts payable increased $819 million primarily due to timing of purchases as we managed inventory replenishment in line with sales trends.

Cash Flows Used in Investing Activities

			Six Months Ended
(In millions)			August 2, 2024						August 4, 2023
Net cash used in investing activities			$	(800)					$	(715)

Net cash used in investing activities primarily consists of transactions related to 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. Capital expenditures were $808 million and $765 million for the six months ended August 2, 2024, and August 4, 2023, respectively. For fiscal 2024, our guidance for capital expenditures is approximately $2.0 billion.

Cash Flows Used in Financing Activities

			Six Months Ended
(In millions)			August 2, 2024						August 4, 2023
Net cash used in financing activities			$	(3,176)					$	(3,107)

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

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Debt

Our commercial paper program is supported by the 2023 Credit Agreement and the Third Amended and Restated Credit Agreement. The amounts available to be drawn under the 2023 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, 2023 Credit Agreement, or the Third Amended and Restated Credit Agreement as of August 2, 2024. Total combined availability under the 2023 Credit Agreement and the Third Amended and Restated Credit Agreement as of August 2, 2024, was $4.0 billion.

The 2023 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 2, 2024.

The following table includes additional information related to our debt for the six months ended August 2, 2024, and August 4, 2023:

			Six Months Ended
(In millions)			August 2, 2024						August 4, 2023
Net proceeds from issuance of debt			$	—					$	2,983
Repayment of debt			(47)						(45)
Net change in commercial paper			—						(499)
Maximum commercial paper outstanding at any period			250						2,195

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 2, 2024, and August 4, 2023:

			Six Months Ended
(In millions, except per share data)			August 2, 2024						August 4, 2023
Total amount paid for share repurchases1			$	1,930					$	4,356
Total number of shares repurchased			8.4						21.0
Average price paid per share			$	230.91					$	207.60

1 Excludes unsettled share repurchases and unpaid excise taxes.

As of August 2, 2024, we had $12.9 billion remaining available under our share repurchase program with no expiration date. The Company determines the timing and amount of repurchases based on its assessment of various factors including prevailing market conditions, alternate uses of capital, liquidity, and the economic environment, among others. The timing and amount of these share repurchases are subject to change at any time.

Dividends

Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from $2.10 per share for the six months ended August 4, 2023, to $2.20 per share for the six months ended August 2, 2024.

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 29, 2024, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. 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.

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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.