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 nine months ended November 1, 2024, and November 3, 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												Nine Months Ended
(in millions, except per share data)			November 1, 2024						November 3, 2023						November 1, 2024						November 3, 2023
Net sales			$	20,170					$	20,471					$	65,120					$	67,775
Net earnings			1,695						1,773						5,833						6,706
Diluted earnings per share			2.99						3.06						10.22						11.40
Net cash provided by operating activities															$	8,714					$	7,032
Capital expenditures															1,379						1,344
Repurchases of common stock1															2,515						5,930
Cash dividend payments															1,916						1,899

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

Net sales in the third quarter of fiscal 2024 declined 1.5% to $20.2 billion compared to net sales of $20.5 billion in the third quarter of fiscal 2023. Comparable sales for the third quarter of fiscal 2024 decreased 1.1%, consisting of a 1.3% decrease in comparable customer transactions, partially offset by an increase of 0.2% in comparable average ticket. Net earnings in the third quarter of fiscal 2024 were $1.7 billion, compared to net earnings of $1.8 billion in the third quarter of fiscal 2023. Diluted earnings per common share were $2.99 in the third quarter of fiscal 2024 compared to $3.06 in the third quarter of fiscal 2023. Included in the third quarter of 2024 results was pre-tax income of $54 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 $0.10. Excluding the impact of this item, adjusted diluted earnings per common share was $2.89 in the third quarter of 2024 (see the non-GAAP financial measures discussion).

For the first nine months of fiscal 2024, cash flows from operating activities were approximately $8.7 billion, with $1.4 billion used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, during the three months ended November 1, 2024, we repurchased $758 million of common stock and paid $654 million in dividends.

Third quarter fiscal 2024 comparable sales declined 1.1% driven by continued softness in Do-It-Yourself (DIY) demand, partially offset by storm-related sales and continued strength with our Pro customers and online. Growth with our Pro customers is driven by the investments we have made to better serve the small-to-medium sized Pro as part of our Total Home strategy. In addition, investments in our supply chain and Pro job site delivery enabled us to quickly mobilize essential supplies to those areas impacted by the recent hurricanes Helene and Milton.

Our continued disciplined expense management across the Company has enabled us to deliver strong operating performance during a challenging economic setting. 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 believe these drivers, along with Millennial household formation and Baby Boomers aging in place, support demand over the long-term, particularly as interest rate pressure begins to ease. In the meantime, we plan to continue investing in our Total

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Home strategy, while maintaining operational discipline, to position the Company for profitable market share growth when the home improvement market recovers.

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						Nine Months Ended												Basis Point Increase/(Decrease) in Percentage of Net Sales
			November 1, 2024						November 3, 2023									November 1, 2024						November 3, 2023
Net sales			100.00		%				100.00		%				N/A						100.00		%				100.00		%				N/A
Gross margin			33.69						33.66						3						33.45						33.67						(22)
Expenses:
Selling, general and administrative			18.97						18.37						60						18.22						17.23						99
Depreciation and amortization			2.15						2.12						3						1.97						1.88						9
Operating income			12.57						13.17						(60)						13.26						14.56						(130)
Interest – net			1.57						1.68						(11)						1.51						1.52						(1)
Pre-tax earnings			11.00						11.49						(49)						11.75						13.04						(129)
Income tax provision			2.59						2.83						(24)						2.79						3.14						(35)
Net earnings			8.41		%				8.66		%				(25)						8.96		%				9.90		%				(94)

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												Nine Months Ended
Other Metrics			November 1, 2024						November 3, 2023						November 1, 2024						November 3, 2023
Comparable sales decrease 1			(1.1)		%				(7.4)		%				(3.6)		%				(4.3)		%
Total customer transactions (in millions)			194						197						632						655
Average ticket 2			$	103.80					$	104.02					$	103.12					$	103.54
At end of period:
Number of stores			1,747						1,746
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			26.8		%				30.5		%
Return on invested capital 4			31.2		%				35.0		%

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 third quarter fiscal 2024 and fiscal 2023 comparable sales by approximately 55 basis points and -40 basis points, respectively, and year-to-date fiscal 2024 and fiscal 2023 sales by approximately 35 basis points and 30 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.

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 November 3, 2023.

Fiscal 2024 Impacts

*•*In the third quarter of fiscal 2024, the Company recognized pre-tax income of $54 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
			November 1, 2024
			Pre-Tax Earnings						Tax****1						Net Earnings
Diluted earnings per share, as reported															$	2.99
Non-GAAP adjustments – per share impacts
Canadian retail business transaction			(0.10)						—						(0.10)
Adjusted diluted earnings per share															$	2.89

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)			November 1, 2024						November 3, 2023
Calculation of Return on Invested Capital
Numerator
Net Earnings			$	6,853					$	7,664
Plus:
Interest expense – net			1,333						1,355
Operating lease interest			172						158
Provision for income taxes			2,137						2,554
Lease adjusted net operating profit			10,495						11,731
Less:
Income tax adjustment1			2,495						2,933
Lease adjusted net operating profit after tax			$	8,000					$	8,798
Denominator
Average debt and shareholders’ deficit2			$	25,603					$	25,125
Net earnings to average debt and shareholders’ deficit			26.8		%				30.5		%
Return on invested capital****3			31.2		%				35.0		%

1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which wa**s 23.8% and 25.0% for the periods ended November 1, 2024, and November 3, 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 periods ended November 1, 2024, and November 3, 2023, return on invested capital was impacted approximately 35 basis points and -125 basis points, respectively, as a result of the sale of the Canadian retail business.

Results of Operations

Net Sales – Net sales in the third quarter of 2024 decreased 1.5% to $20.2 billion. Comparable sales declined 1.1%, consisting of a 1.3% decline in comparable customer transactions, partially offset by a 0.2% increase in comparable average ticket.

During the third quarter of 2024, we experienced growth in Building Materials, Hardware, and Seasonal & Outdoor Living, as well as performance above company average in Paint, which reflect continued strong demand with the Pro customer and online, along with storm-related demand lift.

Net sales in the first nine months of 2024 decreased 3.9% to $65.1 billion. Comparable sales also declined 3.6% over the same period, driven by a 3.6% decline in comparable customer transactions, while comparable average ticket was flat.

Gross Margin – For the third quarter of 2024, gross margin as a percentage of sales increased three basis points. Gross margin rate benefited from ongoing productivity initiatives, partially offset by investments in our supply chain and storm-related product mix and damages.

For the first nine months of 2024, gross margin as a percentage of sales contracted 22 basis points, primarily due to ongoing investments in our supply chain and a decline in credit revenue, partially offset by lower transportation costs.

SG&A – For the third quarter of 2024, SG&A expense deleveraged 60 basis points as a percentage of sales compared to the third quarter of 2023, primarily due to employee compensation & benefits, advertising, and incremental direct storm-related costs, partially offset by the current year gain on contingent consideration associated with the fiscal 2022 sale of the Canadian retail business.

For the first nine months of 2024, SG&A expense as a percentage of sales deleveraged 99 basis points as a percentage of sales, primarily due to the same factors that impacted SG&A for the third quarter, in addition to the cycling of prior year favorable legal settlements.

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

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For the first nine months of 2024, depreciation and amortization deleveraged nine basis points as a percentage of sales.

Interest – Net – Net interest expense for the third quarter of 2024 leveraged 11 basis points as a percentage of sales.

Net interest expense for the first nine months of 2024 leveraged one basis point as a percentage of sales.

Income Tax Provision – Our effective income tax rates were 23.6% and 24.6% for the three months ended November 1, 2024 and November 3, 2023, respectively, and 23.8% and 24.1% for the nine months ended November 1, 2024 and November 3, 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 November 1, 2024, we held $3.3 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

			Nine Months Ended
(In millions)			November 1, 2024						November 3, 2023
Net cash provided by operating activities			$	8,714					$	7,032

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 nine months ended November 1, 2024, compared to the nine months ended November 3, 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 $1.7 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 IRS for businesses located in states impacted by Hurricane Ian. In addition, net cash flows relating to changes in inventory and accounts payable increased $880 million primarily due to a timing shift of purchases relative to the prior year period.

Cash Flows Used in Investing Activities

			Nine Months Ended
(In millions)			November 1, 2024						November 3, 2023
Net cash used in investing activities			$	(1,320)					$	(1,306)

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 and technology to enhance our ability to serve customers, improve existing stores, and support expansion plans. Capital expenditures were $1.4 billion and $1.3 billion for the nine months ended November 1, 2024, and November 3, 2023, respectively. For fiscal 2024, our guidance for capital expenditures is approximately $2.0 billion.

Cash Flows Used in Financing Activities

			Nine Months Ended
(In millions)			November 1, 2024						November 3, 2023
Net cash used in financing activities			$	(5,044)					$	(5,864)

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 November 1, 2024. Total combined availability under the 2023 Credit Agreement and the Third Amended and Restated Credit Agreement as of November 1, 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 November 1, 2024.

The following table includes additional information related to our debt for the nine months ended November 1, 2024, and November 3, 2023:

			Nine Months Ended
(In millions)			November 1, 2024						November 3, 2023
Net proceeds from issuance of debt			$	—					$	2,983
Repayment of debt			(522)						(576)
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 nine months ended November 1, 2024, and November 3, 2023:

			Nine Months Ended
(In millions, except per share data)			November 1, 2024						November 3, 2023
Total amount paid for share repurchases1			$	2,681					$	5,937
Total number of shares repurchased			11.2						21.0
Average price paid per share			$	239.11					$	207.60

1 Excludes unsettled share repurchases and unpaid excise taxes.

As of November 1, 2024, we had $12.2 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 $3.20 per share for the nine months ended November 3, 2023, to $3.35 per share for the nine months ended November 1, 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. 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 27, 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

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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.