Never Stop Improving

Accounting 304, Professor Havens

February 12, 2013

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TABLE OF CONTENTS

Page

INTRODUCTION ............................................................................................................2

AUDIT OPINIONS ……...................................................................................................3

BALANCE SHEET ANALYSIS …....................................................................................4

FINANCIAL RATIOS ……................................................................................................5

INVENTORY ....................................................................................................................5

REVENUE RECOGNITION .............................................................................................5

INCOME STATEMENT ....................................................................................................6

CASH FLOWS .................................................................................................................6

OVERALL ANALYSIS STATEMENT ...............................................................................7

REFERENCES ................................................................................................................9

Introduction: Never Stop Improving

Established in 1946 in Mooresville, NC, Lowe's Inc. (LOW) has evolved from a single small town store to the second largest home improvement retail chain in the United States. Boasting over 1,750 stores in the United States, Canada, and Mexico with annual sales of over $50.2 billion, Lowe's has established itself as a formidable Fortune 50 company. Product offerings include gardening supplies, home décor items, electrical and light fixtures, plumbing, painting supplies, flooring, cabinetry, and appliances. Lowe's also maintains a broad customer base including homeowners, landscapers, novice "do-it yourself-ers", and professional contractors alike.

Now is an especially challenging time for Lowes' financial performance as its success is so closely associated to the US real estate market. This paper will include a broad analysis of the Lowe's Company Inc. (Lowe's) 2011 financial statements to include accounts from the balance sheet, income statement, and statement of cash flows. Lowe's fiscal year ends the Friday nearest the end of January. For 2011, Lowe's fiscal year ended February 03, 2012 with the company recording 53 weeks of activity as compared to FY 2010 and FY 2009 which contained only 52 weeks. All financial reports reflect balances as of February 3, 2012, January 28, 2011, and January 29, 2010 respectively. The intent of analysis is to assess overall performance and financial trends with the goal of understanding how Lowe's is adjusting to the current market and planning for success in the future. In the Executive Overview, Lowe's has acknowledged existing challenges and stated their commitment to the following objectives to "never stop improving":

? Transform from a home improvement retailer to a home improvement company;

? Focus on retail excellence to grow earnings through improved asset productivity rather than through continued expansion; and

? Make and keep their customer support operations seamless and simple. (Lowe's has introduced mylowes.com which allows consumers to create on online home profile to track purchases, create and manage projects, and purchase project materials all from one site.)

Auditors Opinions

Lowe's engaged Deloitte & Touche, LLP (Deloitte) as the independent registered auditor of their financial statements and internal controls over the financial statements. Deloitte performed these audits in accordance with the standards set forth by the appropriate governing bodies to include the use of Generally Accepted Accounting Principles (GAAP) and the Internal Control Framework established by the Treadway Commission. Deloitte expressed an unqualified opinion on the financial statements and determined that, "such consolidated financial statements present fairly, in all material respects, the financial position of the Company…" (Lowes). Additionally, Deloitte expressed and unqualified opinion on Lowe's internal controls over financial reporting. There is no indication that the company reported or disclosed any subsequent events, errors or irregularities or illegal activities. Lowe's Proxy Statement discloses approved related party transactions regarding compensation/awards provided to executives who are related to owners in the company.

Balance Sheet Analysis

Lowe's three largest liabilities are Long Term Debt (21%), Accounts Payable (13%), and Other Current Liabilities (4.5%). Total Liabilities have increased over the last three years, most significantly between 2010 and 2011, with the largest increase in long term debt. During this time, Lowe's invested $1.0 billion to acquire fixed assets to initiate their transformation process to a more customer centric operation. Also of note is the company's use of net earnings to return $3.6 billion to shareholders through share repurchases and cash dividends Lowe's authorized issue of 5.0 million shares of preferred and 5.6 billion of common stock with 1,354 billion shares of common stock outstanding at the end of the 2011 accounting year (no preferred stock was issued or outstanding at this time). Lowe's has a share repurchase program which is executed by open market or private transactions. Repurchased shares are retired and returned to the authorized and unused status.

Lowe's three largest assets include Property (65%), Merchandise Inventory (25%), and Cash (3%). Lowe's largest current asset for 2011 was their merchandise inventory, which grew only marginally from its 2009 and 2010 levels. The largest long term asset of course, remains their property, which has actually declined over the three year period due to store closings targeted at preserving a leaner more efficient business model. In 2011, Lowe's closed 27 underperforming stores and recorded impairment losses of $388 million including $40M for operating locations and $269 for locations identified for closure. (Lowes, 2012)

Financial Ratios

Lowe's efficiency in managing its operations and assets are demonstrated in key financial ratios. Lowe's ROA is 5.4%; ROE for the same period is 10.7%. Inventory management is vital to maintaining competiveness in any retail operation. Lowe's has managed to maintain both its inventory turnover and gross margins. Inventory turnover for Lowe's is 6.01 based on $50.2 billion in net sales and merchandise inventory of $ 8.35 billion, which is excellent compared to the industry standard of 10.52. Additionally, Lowe's total assets are being managed efficiently as indicated by a total asset turnover ratio of 1.5 compared 1.6 for the industry in general with a gross margin of 34.5%. (Williams, 2012). Lowe's has relied primarily on internal funds and equity to finance its operations. Its long term debt to equity ratio of 20% underscores its reliance on equity to finance operations and its stability of future operations.

Inventory

Lowe's measures its merchandise inventory using the first-in, first-out method of inventory accounting and reports figures at lower of cost or market. They maintain an inventory reserve for potential losses that can occur if inventory is sold below cost and for shrinkage between physical inventories. The cost of inventory also includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds. Management does not believe Lowe's merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions.

Lowe's receives funds from vendors as a result of purchase volumes, sales, early payments or promotions of vendors' products. These funds are treated as a reduction in the cost of inventory as the amounts are accrued, and are recognized as a reduction of cost of sales when the inventory is sold. Lowe's has also developed accrual rates for vendor funds