LOWE'S COMPANIES, INC. The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period endedJanuary 29, 2021 (our fiscal years 2020, 2019, and 2018). Unless otherwise noted, all references herein for the years 2020, 2019, and 2018 represent the fiscal years endedJanuary 29, 2021 ,January 31, 2020 , andFebruary 1, 2019 , respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted inthe United States of America . This discussion and analysis is presented in six sections: • Executive Overview • Operations • Financial Condition, Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Contractual Obligations and Commercial Commitments • Critical Accounting Policies and Estimates
EXECUTIVE OVERVIEW
Performance Overview
Net sales for fiscal 2020 increased 24.2% over fiscal year 2019 to$89.6 billion . The increase in total sales was driven by an increase in comparable sales, primarily offset by a decrease in sales due to closed stores. Comparable sales increased 26.1% over fiscal year 2019, driven by an increase in comparable transactions of 14.0% and an increase in comparable average ticket of 12.1%. Net earnings for fiscal 2020 increased 36.3% to$5.8 billion . Diluted earnings per common share increased 41.3% in fiscal year 2020 to$7.75 from$5.49 in 2019. Included in the fiscal 2020 results is a$1.1 billion pre-tax loss on extinguishment of debt from cash tender offers to purchase and retire an aggregate principal amount of$3.0 billion in outstanding notes with a weighted average interest rate of 4.80%. The Company funded the cash tender offers with a$4.0 billion issuance of unsecured notes with a weighted average interest rate of 2.17%. These efforts took advantage of a favorable interest rate environment to reduce our long-term interest expense. Also included in the results for fiscal 2020 and 2019 are operating costs related to theCanada restructuring actions. Adjusting 2020 and 2019 amounts for these discrete items not contemplated in the business outlooks for those respective years, adjusted diluted earnings per common share increased 54.4% in fiscal year 2020 to$8.86 from$5.74 in 2019 (see the non-GAAP financial measures discussion). For 2020, cash flows from operating activities were$11.0 billion , with$1.8 billion used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased$5.0 billion of common stock and paid$1.7 billion in dividends during the year. In 2020, we experienced unprecedented customer demand as the consumer mindset turned its focus to the function and enjoyment of their home. During the COVID-19 pandemic, the home has become a residence, a home school, a home office and the primary location for recreation and entertainment. Due to our execution of the Company's retail fundamentals strategy announced in 2018, which focused on merchandising excellence, supply chain transformation, operational efficiency, and customer engagement, we leveraged our improved operating capabilities to quickly respond to the global health crisis and meet customer demands. The COVID-19 pandemic changed the way customers shop withLowe's . In an effort to enhance our omni-channel capabilities and to offer options to meet our customer's needs, we rapidly rolled out curbside pickup in the first quarter. We then launched mobile check-in for curbside pickup along with an internal order picking app to improve associates' speed and accuracy in fulfilling orders, and began the launch of touchless buy online pickup in store (BOPIS) lockers. We also continue to enhance our mobile app to improve the customer pickup experience, including geofencing technology that alerts our stores when customers are on their way to pick up their orders. In addition, we completed the re-platforming of Lowes.com to the cloud which greatly improved site stability and functionality allowing us to achieve triple-digit online sales growth for the year. To provide customers with a more intuitive shopping experience and better align our product adjacencies, especially for Pro customers, we made a significant merchandising investment to reset the layout of ourU.S. stores (U.S. Stores Reset). TheU.S. Stores Reset provides a faster shopping experience, increases localized product assortments by eliminating unproductive bays 18 -------------------------------------------------------------------------------- Table of Contents which opens up space for new products better tailored to the local market, and drives more transactions by moving the basket-building category of cleaning products to the main power aisle of the store. The Company incurred approximately$260 million of incremental expense in 2020, which is reflected within selling, general and administrative (SG&A) expenses in the consolidated statement of earnings, with approximately 95% of the resets complete as of the end of the fiscal year. In addition, throughout 2020, we continued to focus on gaining market share with the Pro customer. We continue to elevate our brand and product offerings in the job lot quantities they need. During the fourth quarter, we launched our new Pro customer relationship management (CRM) tool which provides our Pro Desk with tools to manage, grow and retain our Pro customers through consistent and data-driven selling actions.
COVID-19 Response
We began the year focused on executing our retail strategy; however, we rapidly re-prioritized our objectives to address the impacts of COVID-19. Our Company has been committed to the following priorities while navigating the COVID-19 pandemic: 1.Protecting the health and safety of our associates and customers through a safe store environment and shopping experience, 2.Financially supporting our associates during this challenging time, and 3.Providing support for our community, including healthcare providers and first responders. We implemented a number of initiatives to facilitate a safer store environment throughout the year, including supporting social distancing by adding signage and floor markers, installing plexiglass shields at the point-of-sale areas, and designating social distancing ambassadors to monitor customer flow traffic; enhancing cleaning procedures; and adopted a requirement for all front-line associates to wear masks and a nationwide standard for all customers to wear masks. For the year, we invested nearly$1.3 billion in COVID-related support for our associates, store safety and communities. As part of our commitment to provide financial assistance to our associates, this investment was inclusive of$915 million of expense to support our associates, which included seven discretionary payments for our hourly associates, a$2 per hour temporary wage increase for hourly associates during the month of April, and emergency paid leave for all associates who needed it. In addition, our support included$109 million in pandemic relief to support our communities, including grants to support minority-owned and rural small businesses.
Looking Forward
In late 2020, after a period of time spent focusing on improving our retail fundamentals, we unveiled our Total Home strategy, which is our commitment to providing a full complement of products and services for Pros and Consumers alike, enabling a Total Home solution for every need in the home. We believe our Total Home strategy will enhance customer engagement and grow market share by intensifying our focus on the Pro customer, expanding our online business, modernizing installation services, improving localization efforts, and elevating our product assortment.
In the coming year, we remain focused on growing market share, improving operating profitability, and driving sustainable growth. While there is uncertainty in the market and the home improvement sector, we believe we have the flexibility to manage and adapt our business in a dynamic economic environment.
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OPERATIONS
The following tables set forth the percentage relationship to net sales of each
line item of the consolidated statements of earnings, as well as the percentage
change in dollar amounts from the prior year. This table should be read in
conjunction with the following discussion and analysis and the consolidated
financial statements, including the related notes to the consolidated financial
statements.
Basis Point Increase /
(Decrease) in Percentage Percentage Increase /
of Net Sales from Prior (Decrease) in Dollar Amounts
Year from Prior Year
2020 2019 2020 vs. 2019 2020 vs. 2019
Net sales 100.00 % 100.00 % N/A 24.2 %
Gross margin 33.01 31.80 121 28.9
Expenses:
Selling, general and 20.68 21.30 (62) 20.6
administrative
Depreciation and amortization 1.56 1.75 (19) 10.9
Operating income 10.77 8.75 202 52.8
Interest - net 0.95 0.96 (1) 22.9
Loss on extinguishment of debt 1.18 - 118 N/A
Pre-tax earnings 8.64 7.79 85 37.6
Income tax provision 2.13 1.86 27 41.8
Net earnings 6.51 % 5.93 % 58 36.3 %
Basis Point Increase /
(Decrease) in Percentage Percentage Increase /
of Net Sales from Prior (Decrease) in Dollar Amounts
Year from Prior Year
2019 2018 2019 vs. 2018 2019 vs. 2018
Net sales 100.00 % 100.00 % N/A 1.2 %
Gross margin 31.80 32.12 (32) 0.2
Expenses:
Selling, general and
administrative 21.30 24.41 (311) (11.7)
Depreciation and amortization 1.75 2.07 (32) (14.5)
Operating income 8.75 5.64 311 57.1
Interest - net 0.96 0.88 8 10.6
Pre-tax earnings 7.79 4.76 303 65.7
Income tax provision 1.86 1.52 34 24.3
Net earnings 5.93 % 3.24 % 269 85.0 %
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,
including the related notes to the consolidated financial statements.
Beginning on February 1, 2020 , the Company changed the basis in which it
presents the comparable sales metric. The current metric is presented on a
transacted basis when tender is accepted from a customer. Prior to this change,
the Company's comparable sales metric was based on when control of the good or
service passed to the customer, which included timing impacts of deferred sales.
The purpose of the change was to align the metric with how the Lowe's management
team evaluates the business throughout the year and views performance relative
to peers. For the fiscal year ended January 29, 2021 , the impact of excluding
deferred sales increased the comparable sales metric by 62 basis points. For the
fiscal year ended January 31, 2020 , the impact of excluding deferred sales
decreased the comparable sales metric by 7 basis points. For the fiscal year
ended February 1, 2019 , the impact of excluding deferred sales decreased the
comparable sales metric by 20 basis points. The comparable sales metric for the
fiscal years ended January 31, 2020 and February 1, 2019 , has been recast to
conform to the current year presentation.
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--------------------------------------------------------------------------------Table of Contents Other Metrics 2020 2019 2018 Comparable sales increase 1 26.1 % 2.6 % 2.2 % Total customer transactions (in millions) 1,046 921 941 Average ticket 2$ 85.67 $ 78.36 $ 75.79 At end of year: Number of stores 1,974 1,977 2,015 Sales floor square feet (in millions) 208 208 209
Average store size selling square feet (in thousands) 3 105
105 104
Return on average assets 4 12.4 % 10.8 % 6.4 %
Return on average shareholders' equity 5 215.2 % 153.4 % 43.8 %
Net earnings to average debt and equity 6 21.9 % 17.2 % 9.0 %
Return on invested capital 6 27.7 % 19.9 % 11.2 %
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 have decided to close is no longer considered comparable as of the
beginning of the month in which we announce its closing. Comparable sales
include online sales, which positively impacted fiscal 2020, fiscal 2019, and
fiscal 2018 by approximately 565 basis points, 25 basis points, and 80 basis
points, respectively.
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 average assets is defined as net earnings divided by average total
assets for the last five quarters.
5 Return on average shareholders' equity is defined as net earnings divided by
average shareholders' equity for the last five quarters.
6 Return on invested capital is calculated using a non-GAAP financial measure.
Net earnings to average debt and equity is the most comparable GAAP ratio. 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. Management believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company's core financial performance. Adjusted diluted earnings per share excludes the impact of certain discrete items not contemplated in the Company's business outlooks for 2020 and 2019. Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rates for the respective periods. Fiscal 2020 Impacts •In the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and in the fourth quarter of fiscal 2019, the Company announced additional restructuring actions to improve future performance and profitability of its Canadian operations. As a result of these actions, the Company recognized pre-tax operating costs of$45 million related to inventory write-downs and other closing costs in fiscal 2020 (Canada restructuring).
•In the third quarter of fiscal 2020, the Company recognized a
Fiscal 2019 Impacts •Prior to the beginning of fiscal 2019, the Company announced its intention to exit itsMexico retail operations and had planned to sell the operating business. However, in the first quarter of fiscal 2019, after an extensive market evaluation, the decision was made to instead sell the assets of the business. That decision resulted in an$82 million tax benefit. Additionally, the Company recognized$35 million of pre-tax operating costs associated with the exit and ongoing wind-down of theMexico retail operations in fiscal 2019 (Mexico adjustments). •During the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations resulting in pre-tax charges of$53 million associated with long-lived asset impairment. In the fourth quarter, the Company recognized pre-tax operating costs and charges of$176 million related to inventory liquidation, accelerated depreciation and amortization, severance, and other costs, as well as a net$26 million impact to income tax expense 21 -------------------------------------------------------------------------------- Table of Contents related to income tax valuation allowance. Total pre-tax operating costs and charges for fiscal 2019 were$230 million (Canada restructuring). Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company's diluted earnings per common share as prepared in accordance with GAAP. The Company's methods of determining this non-GAAP financial measure may differ from the method used by other companies and may not be comparable. 2020 2019 Pre-Tax Earnings Tax Net Earnings Pre-Tax Earnings Tax Net Earnings Diluted earnings per share, as reported$ 7.75 $
5.49
Non-GAAP Adjustments - per share impacts Loss on extinguishment of debt 1.41 (0.36) 1.05 - - - Canada restructuring 0.06 - 0.06 0.29 0.02 0.31 Mexico adjustments - - - 0.05 (0.11) (0.06) Adjusted diluted earnings per share$ 8.86 $ 5.74 Return onInvested Capital Return onInvested 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 profits. 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 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: (In millions, except percentage data) 2020 2019
2018
Calculation of Return onInvested Capital Numerator Net earnings$ 5,835 $ 4,281 $ 2,314 Plus: Interest expense - net 848 691 624 Operating lease interest 171 195 206 Loss on extinguishment of debt 1,060 -
-
Provision for income taxes 1,904 1,342
1,080
Lease adjusted net operating profit 9,818 6,509
4,224
Less:
Income tax adjustment 1 2,416 1,554
1,344
Lease adjusted net operating profit after tax
$ 2,880 Denominator Average debt and equity 2$ 26,686 $ 24,950 $ 25,713 Net earnings to average debt and equity 21.9 % 17.2 % 9.0 % Return on invested capital 27.7 % 19.9 % 11.2 % 1 Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 24.6%, 23.9%, and 31.8% for 2020, 2019, and 2018, respectively. 2 Average debt and 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 equity. 22
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Fiscal 2020 Compared to Fiscal 2019
Net Sales - Net sales increased 24.2% to$89.6 billion in 2020. The increase in total sales was driven primarily by comparable sales growth. Comparable sales increased 26.1% over the same period, driven by a 14.0% increase in comparable customer transactions and a 12.1% increase in comparable average ticket. Comparable sales increases during each quarter of the fiscal year, as reported, were 11.2% in the first quarter, 34.2% in the second quarter, 30.1% in the third quarter, and 28.1% in the fourth quarter. During 2020, we experienced comparable sales increases in all 15 product categories, and broad-based growth with both DIY and Pro customers. Comparable sales were above the Company average in Lumber, Lawn & Garden, Paint, Seasonal & Outdoor Living, Tools, and Décor. Lumber experienced strong performance driven by strong unit demand from both DIY and Pro customers, as well as benefits from improved investments in job lot quantities and commodity inflation. As customers focused on the home this year, Lawn & Garden, Paint, and Tools experienced significant increases from indoor and outdoor DIY friendly home projects and improvements. Lawn & Garden also saw benefit due to COVID-19 preparation in cleaning. Seasonal & Outdoor Living saw increased sales driven by favorable weather, and Décor delivered strong performance in home accents and home organization as customers continue to look for impactful DIY projects. Geographically, all 15 U.S. regions experienced positive comparable sales of at least 20%, whileCanada delivered comparable sales of 15%. During the fourth quarter of 2020, we also experienced comparable sales increases in all 15 product categories. Comparable sales increases were above the company average in Lumber, Seasonal & Outdoor Living, Lawn & Garden, Paint,Building Materials , Electrical, and Décor. Lumber led the sales performance due to strong demand with Pro and DIY customers as well as commodity inflation. Seasonal & Outdoor Living experienced strong performance during the holiday season with a holiday trim-a-tree program that exceeded the customer's expectations. Lawn & Garden and Paint benefited from consumers' continued focus on the home. Building Materials saw strong demand with the Pro customer, particularly in roofing and gutters. Geographically, all 15 U.S. regions experienced increases in fourth quarter comparable sales of at least 19%, andCanada delivered increased comparable sales of 18%. Gross Margin - Gross margin as a percentage of sales for 2020 increased 121 basis points compared to 2019. Gross margin was positively impacted by approximately 235 basis points of total rate improvement driven by continued improvements in our pricing and promotional strategies as well as approximately 20 basis points of leverage due to prior year impact of store closures and inventory liquidation associated with the Canadian restructuring. These benefits were partially offset by 25 basis points of deleverage from supply chain costs, 25 basis points of deleverage from lower credit revenue, 25 basis points of deleverage due to product mix, 20 basis points of deleverage from inventory shrink, and 20 basis points of deleverage due to tariff pressure. During the fourth quarter of 2020, gross margin increased 70 basis points as a percentage of sales. Gross margin was positively impacted by approximately 145 basis points of total rate improvement driven by continued improvements in our pricing, cost management, and promotional strategies as well as 80 basis points of leverage due to prior year impact of store closures and inventory liquidation associated with the Canadian restructuring. These benefits were partially offset by 40 basis points of deleverage related to supply chain costs, 40 basis points of deleverage from inventory shrink, 35 basis points of deleverage due to product mix, and 20 basis points of deleverage from lower credit revenue. SG&A - SG&A expense for 2020 leveraged 62 basis points as a percentage of sales compared to 2019. This was primarily driven by 115 basis points of leverage in retail operating salaries due to increased sales and improved store operating efficiencies, 30 basis points of leverage in advertising, 30 basis point of leverage in occupancy related to increased sales and decreased lease expenses, and 15 basis points of leverage related to the Company's Canadian restructuring, which included prior year long-lived asset impairment, severance and other costs as well as current year closing costs. These were partially offset by 135 deleverage due to COVID-19 related expenses, including discretionary bonuses paid to hourly front-line employees, emergency paid leave, and increased cleaning costs and other safety-related programs, and 30 basis points of deleverage due to ourU.S. Stores Reset. For the fourth quarter of 2020, SG&A expense leveraged 63 basis points as a percentage of sales compared to the fourth quarter of 2019. This was primarily driven by 130 basis points of leverage in retail operating salaries due to increased sales and improved store operating efficiencies, 30 basis points of leverage in occupancy related to increased sales and decreased lease expense, 25 basis points of leverage in advertising, 20 basis points of leverage related to the Company's Canadian restructuring, which included prior year long-lived asset impairment, severance and other costs as well as current year closing costs, and 15 basis points of leverage in utilities related to efficiency upgrades. These were partially offset by 80 basis points deleverage due 23
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to COVID-19 related expenses, including hourly front-line employee bonus,
emergency paid leave, and increased cleaning costs and other safety-related
programs, and 75 basis points deleverage due to our
Depreciation and Amortization - Depreciation and amortization expense leveraged 19 basis points for 2020 as a percentage of sales compared to 2019, driven by increased sales in the current year. Depreciation and amortization expense increased year over year due to incremental depreciation related to investments in the business. Property, less accumulated depreciation, increased to$19.2 billion atJanuary 29, 2021 , compared to$18.8 billion atJanuary 31, 2020 . As ofJanuary 29, 2021 , andJanuary 31, 2020 , we owned 84% of our stores, which included stores on leased land.
Interest - Net - Net interest expense is comprised of the following: (In millions)
2020 2019
Interest expense, net of amount capitalized $ 859 $ 706
Amortization of original issue discount and loan costs 13 12
Interest income (24) (27)
Interest - net $ 848 $ 691
Net interest expense in 2020 leveraged one basis point primarily as a result of
increased sales in the current year, offset by interest expense related to the
issuance of $4.0 billion unsecured notes in March 2020 and $4.0 billion
unsecured notes in October 2020 .
Loss on Extinguishment of Debt - During the third quarter of 2020, we
repurchased and retired
Income Tax Provision - Our effective income tax rate was 24.6% in 2020 compared to 23.9% in 2019. For 2019, the rate was favorably impacted by the tax benefit associated with the Company's decision to sell the assets of theMexico business, which was offset by a valuation allowance established for the Company's RONA inc. entity inCanada . Our effective income tax rates were 25.9% and 34.3% for the three months endedJanuary 29, 2021 andJanuary 31, 2020 , respectively. Our effective income tax rate for the fourth quarter of 2019 was negatively impacted by the valuation allowance established for the Company's RONA inc. entity inCanada .
Fiscal 2019 Compared to Fiscal 2018
For a comparison of our results of operations for the fiscal years endedJanuary 31, 2020 andFebruary 1, 2019 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 , filed with theSEC onMarch 23, 2020 .
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Significant customer demand and operating performance for the fiscal year drove a substantial increase in cash flows from operations. These increases, supplemented with our short-term and long-term borrowings, have provided ample liquidity to fund our operations while allowing us to make strategic investments in our omni-channel capabilities to support long-term growth and return excess cash to shareholders in the form of dividends and share repurchases. As ofJanuary 29, 2021 , we held$4.7 billion of cash and cash equivalents, as well as$3 billion in undrawn capacity on our revolving credit facilities. We believe that our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due, pay dividends, and fund our share repurchases over the next 12 months.
Cash Flows Provided by Operating Activities
(In millions) 2020 2019 2018
Net cash provided by operating activities $ 11,049 $ 4,296 $ 6,193
24-------------------------------------------------------------------------------- Table of Contents 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 year endedJanuary 29, 2021 versus the year endedJanuary 31, 2020 , was due primarily to higher net earnings and changes in working capital. Accounts payable increased for fiscal 2020 by$3.2 billion compared to a decrease of$637 million in fiscal 2019, driving an additional$3.8 billion in operating cash flows for fiscal 2020. The increase in accounts payable was driven by higher sustained inventory purchase volume in 2020 as compared to 2019. Other operating liabilities increased$813 million for fiscal 2020 compared to a decrease of$639 million in fiscal 2019. The increase in other operating liabilities in the current year is primarily driven by increases in accrued compensation and employee benefits, and increased accrued payroll taxes due to the deferral of qualifying employer payroll taxes in accordance with the Coronavirus, Aid, Relief, and Economic Securities Act (the CARES Act). Inventory decreased operating cash flow for fiscal 2020 by approximately$3.0 billion compared to a decrease of$600 million for fiscal 2019, primarily due to higher inventory purchases to meet sustained customer demand in 2020, as well as build-up of inventory for the spring selling season.
Cash Flows Used in Investing Activities
(In millions) 2020 2019 2018
Net cash used in investing activities $ (1,894) $ (1,369) $ (1,080) 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. Capital expenditures were$1.8 billion in 2020,$1.5 billion in 2019, and$1.2 billion in 2018. The following table provides the allocation of capital expenditures for 2020, 2019, and 2018: 2020
2019 2018
Existing store investments ¹ 85 % 80 % 60 %
Strategic initiatives ² 10 % 10 % 20 %
New stores, new corporate facilities and international 3 5 %
10 % 20 %
Total capital expenditures 100 % 100 % 100 %
1Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts. 2Represents investments related to our strategic focus areas aimed at improving customers' experience and driving improved performance in the near and long term. 3Represents 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 2021 capital expenditures forecast is approximately
2021
Existing store investments 60 %
Strategic initiatives 30 %
New stores, new corporate facilities and international 10 %
Cash Flows Used in Financing Activities
(In millions) 2020 2019 2018
Net cash used in financing activities $ (5,191) $ (2,735) $ (5,124) Net cash used in financing activities primarily consist of transactions related to our short-term borrowings, long-term debt, share repurchases, and cash dividend payments.
Short-term Borrowing Facilities
InMarch 2020 , we entered into a$1.02 billion five-year unsecured revolving credit agreement (the 2020 Credit Agreement) with a syndicate of banks. In addition, we have a$1.98 billion five-year unsecured revolving second amended and restated 25
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credit agreement (the Second Amended and Restated Credit Agreement) with a
syndicate of banks. Subject to obtaining commitments from the lenders and
satisfying other conditions specified in the 2020 Credit Agreement and the
Second Amended and Restated Credit Agreement, the Company may increase the
combined aggregate availability of both agreements by an additional
In
InSeptember 2019 , we entered into a$250 million unsecured 364-day credit agreement (the 2019 Credit Agreement) with a syndicate of banks. In connection with the 2020 Credit Agreement, the Company refinanced the 2019 Credit Agreement and terminated any commitments under the 2019 Credit Agreement as ofMarch 23, 2020 . The 2020 Credit Agreement and the Second Amended and Restated Credit Agreement support our commercial paper program. The amount available to be drawn under the 2020 Credit Agreement and the Second 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 Second Amended and Restated Credit Agreement as ofJanuary 29, 2021 . Outstanding borrowings under the Company's commercial paper program were$941 million , with a weighted average interest rate of 2.10%, as ofJanuary 31, 2020 . There was$1.0 billion in outstanding borrowings under the Term Loan, with a weighted average interest rate of 2.29%, and no borrowings outstanding under the Second Amended and Restated Credit Agreement or the 2019 Credit Agreement as ofJanuary 31, 2020 . Total combined availability under the 2020 Credit Agreement and the Second Amended and Restated Credit Agreement as ofJanuary 29, 2021 , was$3.0 billion . Our commercial paper program, along with cash flows generated from operations, is typically utilized during our fourth fiscal quarter to build inventory in anticipation of the spring selling season. The following table includes additional information related to our short-term borrowings for 2020, 2019, and 2018: (In millions, except for interest rate data) 2020 2019 2018 Net change in commercial paper$ (941) $ 220 $ (415) Maximum commercial paper outstanding at any month-end$ 1,858 $ 1,364 $ 892 Short-term borrowings outstanding at year-end $ -$ 1,941 $ 722 Weighted-average interest rate of short-term borrowings outstanding - % 2.14 % 2.81 %
The Second Amended and Restated Credit Agreement and the 2020 Credit Agreement
contain customary representations, warranties, and covenants. We were in
compliance with those covenants at
Long-term Debt
The following table includes additional information related to the Company's long-term debt for 2020, 2019, and 2018:
(In millions) 2020 2019 2018
Net proceeds from issuance of debt $ 7,929 $ 3,972 $ -
Repayment of debt $ (5,618) $ (1,113) $ (326)
In 2020, we issued $8.0 billion of unsecured notes. This is comprised of $4.0
billion of unsecured notes issued in March 2020 to finance current year
maturities and for other general corporate purposes and $4.0 billion of
unsecured notes issued in October 2020 to fund the 2020 cash tender offers to
purchase existing unsecured notes and for other general corporate purposes. We
completed the tender offers in October 2020 in which we purchased and retired an
aggregate principal amount of $3.0 billion of our higher coupon notes prior to
maturity to take advantage of a favorable interest rate environment to reduce
our long-term interest expense. As part of this transaction, we incurred $1.1
billion of debt extinguishment costs which included premium to noteholders and
the cost of reverse treasury lock derivative contracts associated with the
tender offers. In 2020, we paid $500 million to repay scheduled long-term debts
at maturity.
In 2019, we issued $3.0 billion of unsecured notes to finance 2019 maturities
and for other general corporate purposes, which included share repurchases,
capital expenditures, strategic investments, and working capital needs. In 2019,
we paid approximately $1.1 billion to retire scheduled debts at maturity.
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Our ratio of debt to capital (equity plus debt) was 93.8% and 90.7% as of
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 amount paid for share repurchases
for 2020, 2019, and 2018:
(In millions, except per share data) 2020 2019 2018
Total amount paid for share repurchases $ 4,971 $ 4,313 $ 3,037
Total number of shares repurchased 34.5 41.2 31.6
Average price paid per share $ 144.08 $ 104.68 $ 96.18 As of
Dividends
In 2020, we increased our quarterly dividend payment by 9% to$0.60 per share. Our dividend payment dates are established such that dividends are paid in the quarter immediately following the quarter in which they are declared. The following table provides additional information related to our dividend payments for 2020, 2019, and 2018: (In millions, except per share data and percentage data) 2020 2019 2018 Total cash dividend payments$ 1,704 $ 1,618 $ 1,455 Dividends paid per share$ 2.25 $
2.06
Dividend payout ratio 29 % 38 % 63 % Capital Resources We expect to continue to have access to the capital markets on both short-term and long-term bases 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 byStandard & Poor's (S&P) and Moody's as ofMarch 22, 2021 , which is disclosed to provide an enhanced 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 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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing that has, or is reasonably likely
to have, a current or future material effect on our financial condition, cash
flows, results of operations, liquidity, capital expenditures or capital
resources.
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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our significant contractual obligations at
January 29, 2021 :
Payments Due by Period
Contractual Obligations Less Than 1
(in millions) Total Year 1-3 Years 4-5 Years After 5 Years
Long-term debt (principal amounts,
excluding discount and debt issuance
costs) $ 21,312 $ 1,025
774 1,458 1,377 15,781
Finance lease obligations 1, 2 796 113 231 195 257
Operating leases 1, 2 5,519 684 1,413 1,122 2,300
Purchase obligations 3 1,118 654 364 100 -
Total contractual obligations
Amount of Commitment Expiration by Period
Commercial Commitments Less Than 1
(in millions) Total Year 1-3 Years 4-5 Years After 5 Years
Letters of Credit 4 $ 61 $ 4 $ 57 $ - $ -
1 Amounts do not include taxes, common area maintenance, insurance, or
contingent rent because these amounts have historically been insignificant.
2 Amounts include imputed interest.
3 Purchase obligations include agreements to purchase goods or services that
are enforceable, are legally binding, and specify all significant terms,
including fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction. Our
purchase obligations include firm commitments related to certain marketing and
information technology programs, as well as purchases of merchandise inventory.
4 Letters of credit are issued primarily for insurance and construction
contracts.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements and notes to consolidated financial statements presented in this Annual Report requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
Our significant accounting policies are described in Note 1 to the consolidated financial statements included herein. We believe that the following accounting policies affect the most significant estimates and management judgments used in preparing the consolidated financial statements.
Merchandise Inventory
Description
We record an obsolete inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience. During 2020, our reserve increased approximately$77 million to$182 million as ofJanuary 29, 2021 . We also record an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrinkage results from previous physical inventories. Due to COVID-19, the Company did not complete physical inventories for approximately 7% of retail locations originally planned in 2020. For those locations where physical inventories were not completed, the Company recorded an immaterial adjustment for its estimate of shrinkage as ofJanuary 29, 2021 , and these locations will have physical inventories completed byMarch 31, 2021 . During 2020, the inventory shrink reserve increased approximately$121 million to$365 million as ofJanuary 29, 2021 , in response to higher volumes and estimated shrinkage rates based on results from previous physical inventories. 28 -------------------------------------------------------------------------------- Table of Contents In addition, we receive funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments or promotions of vendors' products. Generally, these vendor funds do not represent the reimbursement of specific, incremental and identifiable costs that we incurred to sell the vendor's product. Many of the vendor funds associated with these purchases are earned under agreements that are negotiated on an annual basis or shorter. The funds are recorded as a reduction to the cost of inventory as they are earned. As the related inventory is sold, the amounts are recorded as a reduction to cost of sales. Funds that are determined to be reimbursements of specific, incremental and identifiable costs incurred to sell vendors' products are recorded as an offset to the related expense. Judgments and uncertainties involved in the estimate We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term, and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns or a deterioration in product quality could result in the need for additional reserves. Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories. We also apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value. For vendor funds, we develop accrual rates based on the provisions of the agreements in place. Due to the complexity and diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate and confirm actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met. Effect if actual results differ from assumptions We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for obsolete inventory or inventory shrinkage during the past three fiscal years. We believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. However, it is possible that actual results could differ from recorded reserves. A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would have affected net earnings by approximately$14 million for 2020. A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrink reserve would have affected net earnings by approximately$27 million for 2020.
We have not made any material changes in the methodology used to recognize vendor funds during the past three fiscal years. If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory. However, substantially all receivables associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year. Adjustments to gross margin and inventory in the following fiscal year have historically not been material.
Long-Lived Asset Impairment
Description
We review the carrying amounts of locations whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. When evaluating locations for impairment, our asset group is 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. We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location's asset may not be recoverable. For operating locations, our primary indicator that assets may not be recoverable is consistently negative cash flow for a 12-month period for those locations that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results. Management also monitors other factors when evaluating operating locations for impairment, including individual locations' execution of their operating plans and local market conditions, including incursion, which is the opening of either otherLowe's locations or those of a direct competitor within the same market. We also consider there to be a triggering event when there is a current expectation that it is more likely than not that a given location will be closed or otherwise disposed of significantly before the end of its previously estimated useful life. A potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the location's assets are less than the carrying amount of the assets. The carrying value of a location's asset group includes inventory, property, operating and finance lease right-of-use assets and operating liabilities including inventory payables, salaries payable and operating lease liabilities. Financial and nonoperating liabilities are excluded from the carrying 29 -------------------------------------------------------------------------------- Table of Contents value of the asset group. When determining the stream of projected future cash flows associated with an individual operating location, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and operating expense, as well as asset residual values or lease rates. Operating lease payments are included in the projected future cash flows. Financing lease payments are excluded from the projected future cash flows. An impairment loss is recognized when the carrying amount of the operating location is not recoverable and exceeds its fair value. We use an income approach to determine the fair value of our individual operating locations, which requires discounting projected future cash flows. This involves making assumptions regarding both a location's future cash flows, as described above, and an appropriate discount rate to determine the present value of those future cash flows. We discount our cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. The selected market participants represent a group of other retailers with a market footprint similar in size to ours. We use a market approach to determine the fair value of our individual locations identified for closure. This involves making assumptions regarding the estimated selling prices or estimated lease rates by obtaining information from property brokers or appraisers in the specific markets being evaluated. The information includes comparable sales of similar assets and assumptions about demand in the market for purchase or lease of these assets. Judgments and uncertainties involved in the estimate Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed 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 for operating locations, and estimated selling prices or lease rates for locations identified for closure. We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate for fair values determined using an income approach. Effect if actual results differ from assumptions During fiscal years 2020 and 2019, long-lived asset impairment recorded within selling, general and administrative expenses in the consolidated statements of earnings was immaterial. We have not made any material changes in the methodology used to estimate the future cash flows of operating locations or locations identified for closure during the past three fiscal years. If the actual results are not consistent with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary from our estimated impairment losses. In the event that our estimates vary from actual results, we may record additional impairment losses, which could be material to our results of operations.
Description
We are self-insured for certain losses relating to workers' compensation, automobile, general and product liability, extended protection plans, and certain medical and dental claims. We have excess insurance coverage above certain retention amounts to limit exposure from single events and earnings volatility. Our self-insured retention or deductible, as applicable, is limited to$2 million per occurrence involving workers' compensation,$10 million per occurrence involving general or product liability, and$10 million per occurrence involving automobile. We do not have any excess insurance coverage for self-insured extended protection plan or medical and dental claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. During 2020, our self-insurance liabilities decreased approximately$11 million to$1.1 billion as ofJanuary 29, 2021 . Judgments and uncertainties involved in the estimate These estimates are subject to changes in the regulatory environment, utilized discount rate, projected exposures including payroll, sales and vehicle units, as well as the frequency, lag and severity of claims. Effect if actual results differ from assumptions We have not made any material changes in the methodology used to establish our self-insurance liability during the past three fiscal years. Although we believe that we have the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our self-insurance liability would have affected net earnings by approximately$82 million for 2020. A 100 basis point change in our discount rate would have affected net earnings by approximately$23 million for 2020. 30
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