LOW

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended November 2, 2007, for Lowe's Companies, Inc., a large accelerated filer incorporated in North Carolina. The company operates home improvement retail stores across the United States and Canada. As of the reporting date, the company operated 1,464 stores with approximately 166 million square feet of sales floor space.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales increased 3.2% for the quarter and 3.8% for the nine-month period compared to the prior year, driven primarily by the addition of 134 new stores over the last four quarters.
• Comparable Store Sales: Comparable store sales declined 4.3% for both the quarter and the nine-month period, reflecting a challenging sales environment, housing market deterioration, and weather-related impacts (drought and warmer temperatures).
• Profitability: Net earnings decreased 10.3% for the quarter and 3.7% for the nine-month period. Gross margin percentage decreased 20 basis points in the quarter due to the timing of seasonal markdowns.
• Expenses: Selling, general, and administrative (SG&A) expenses increased as a percentage of sales (de-leveraged) due to lower sales volume impacting fixed costs like payroll and rent, partially offset by a $112 million reduction in self-insurance liabilities.
• Capital Allocation: The company repurchased $1.95 billion of common stock in the first nine months of 2007, compared to $1.74 billion in the prior year period. Dividends per share increased to $0.21 for the nine-month period from $0.13 in the prior year.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expects the challenging sales environment to continue into 2008. The company is focusing on disciplined inventory management, expense control, and leveraging its distribution network. The opening of the 14th regional distribution center has been postponed by six to nine months to align with current sales levels.

Fourth Quarter 2007 Guidance:

• Total Sales: Expected to increase approximately 3%.
• Comparable Store Sales: Expected to decline 3% to 5%.
• Diluted EPS: Expected to be between $0.25 and $0.29.

Fiscal 2007 Full Year Guidance:

• Total Sales: Expected to increase 3% to 4%.
• Comparable Store Sales: Expected to decline approximately 4%.
• Diluted EPS: Expected to be between $1.83 and $1.87.

Risks and Contingencies

• Housing Market: Deterioration in housing metrics and credit market disruptions are significant headwinds, particularly in California, Florida, and the Gulf Coast.
• Legal Proceedings: The company is a defendant in a class action lawsuit in California regarding overtime wages (Cynthia Parris, et al. v. Lowe's HIW, Inc.). The company cannot reasonably estimate the range of loss at this early stage.
• Weather: Drought and warmer-than-normal temperatures negatively impacted sales in the Nursery and outdoor product categories.

Investor Verification Checklist

• Comparable Store Sales Trend: Verify the sustainability of the 4.3% decline in comparable store sales and the impact of regional housing markets on future performance.
• Capital Expenditures: Confirm the revised capital forecast of $4.1 billion net cash outflow for 2007 and the rationale for postponing the 14th regional distribution center.
• Debt Structure: Review the terms of the $1.3 billion senior notes issued in September 2007 and the impact of increased interest expense on future margins.
• Share Repurchases: Monitor the remaining $2.5 billion authorization under the share repurchase program and its execution relative to stock price performance.
• Self-Insurance Reserves: Assess the volatility of self-insurance liabilities, which provided a $112 million benefit in the current quarter due to actuarial adjustments.