Lowe's Companies (LOW) 10-Q 2004 Q3 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________ to _________

Commission file number 1-7898  

 

LOWE'SCOMPANIES,  INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	56-0578072
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1000 Lowe's Blvd., Mooresville, NC	28117
(Address of principal executive offices)	(Zip Code)
Registrant's telephone number, including area code	704-758-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x Yes o No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

CLASS
Common Stock, $.50 par value OUTSTANDING AT DECEMBER 2, 2003 786,353,723

22

TOTAL PAGES

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LOWE'S COMPANIES, INC. - INDEX -
			Page No.
PART 1 - Financial Information
	Item 1.    Financial Statements
		Consolidated Balance Sheets - October 31, 2003 (Unaudited),
		November 1, 2002  (Unaudited) and January 31, 2003	3
		Consolidated Statements of Current and
		Retained Earnings (Unaudited) - three and nine months
		ended October 31, 2003 and November 1, 2002	4
		Consolidated Statements of Cash Flows (Unaudited) -
		nine months ended October 31, 2003 and November 1, 2002	5
		Notes to Consolidated Financial Statements  (Unaudited)	6-10
		Independent Accountants' Report	11
	Item 2.    Management's  Discussion and Analysis of Financial Condition and		12-18
		Results of Operations
	Item 3.    Quantitative and Qualitative Disclosures about Market Risk		19
	Item 4.    Controls and Procedures		19
PART II - Other Information
	Item 6(a). Exhibits		20
	Item 6(b). Reports on Form 8-K		20
	Signature		21
	Exhibit Index		22

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Lowe's Companies, Inc. Consolidated Balance Sheets In Millions, Except Par Value Data
		(Unaudited)  October 31, 2003	(Unaudited)  November 1, 2002	January 31, 2003
Assets
	Current assets:
	Cash and cash equivalents

$        1,196

$      1,305$        853Short-term investments12692273Accounts receivable - net208187172Merchandise inventory5,0064,1513,968Deferred income taxes8111058Other assets285179244Total current assets6,902  6,0245,568Property, less accumulated depreciation11,4259,64810,352Long-term investments1191029Other assets229129160Total assets$ 18,675$ 15,811$ 16,109Liabilities and Shareholders' EquityCurrent liabilities:Short-term borrowings$          -$        50$       50Current maturities of long-term debt773929Accounts payable2,5422,0461,943Employee retirement plans536688Accrued salaries and wages283295306Other current liabilities1,5681,2911,162Total current liabilities     4,5233,787      3,578Long-term debt, excluding current maturities       3,681       3,739      3,736Deferred income taxes588318         478Other long-term liabilities219             15Total liabilities      8,813     7,8537,807Shareholders' equity:Preferred stock - $5 par value, none issued - - -Common stock - $.50 par value;     Shares Issued and Outstanding     October 31, 2003786     November 1, 2002781     January 31, 2003782393390391Capital in excess of par2,1761,9812,023Retained earnings7,2935,5875,887Accumulated other comprehensive income--1Total shareholders' equity     9,8627,958 8,302Total liabilities and shareholders' equity$  18,675$  15,811$ 16,109See accompanying notes to unaudited consolidated financial statements.

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Lowe's Companies, Inc. Consolidated Statements of Current and Retained Earnings (Unaudited) In Millions, Except Per Share Data
		Three Months Ended				Nine Months Ended
		October 31, 2003		November 1, 2002		October 31, 2003		November 1, 2002
Current Earnings		Amount	Percent	Amount	Percent	Amount	Percent	Amount	Percent
Net Sales		$  7,924	100.00	$  6,415	100.00	$  23,909	100.00	$  20,373	100.00
Cost of Sales		5,460	68.90	4,450	69.36	16,560	69.26	14,283	70.11
Gross Margin		2,464	31.10	1,965	30.64	7,349	30.74	6,090	29.89
Expenses:
Selling, general and administrative		1,466	18.50	1,192	18.59	4,212	17.62	3,567	17.51
Store opening costs		37	0.47	28	0.43	82	0.34	88	0.43
Depreciation		193	2.44	159	2.48	557	2.33	458	2.25
Interest		42	0.53	44	0.69	136	0.57	137	0.67
Total expenses		1,738	21.94	1,423	22.19	4,987	20.86	4,250	20.86
Pre-tax earnings		726	9.16	542	8.45	2,362	9.88	1,840	9.03
Income tax provision		274	3.46	203	3.16	893
3.74	688	3.38
Net earnings		$    452	5.70	$     339	5.29	$    1,469	6.14	$    1,152	5.65
Weighted average shares outstanding - Basic		786		781		784		779
Basic earnings per share		$   0.58		$    0.44		$   1.87		$    1.48
Weighted average shares outstanding - Diluted		808		801		805		800
Diluted earnings per share		$    0.56		$    0.43		$    1.84		$    1.45
Retained Earnings
Balance at beginning of period		$   6,865		$   5,263		$   5,887		$   4,482
Net earnings		452		339		1,469		1,152
Cash dividends		(24)		(15)		(63)		(47)
Balance at end of period		$   7,293		$   5,587		$   7,293		$   5,587
See accompanying notes to unaudited consolidated financial statements.

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Lowe's Companies, Inc. Consolidated Statements of Cash Flows (Unaudited) In Millions
		Nine Months Ended
		October 31, 2003	November 1, 2002
Cash Flows from Operating Activities:
	Net Earnings	$    1,469	$    1,152
	Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities:
	Depreciation and Amortization	571	472
	Deferred Income Taxes	87	(4)
	Loss on Disposition/Writedown of Fixed and  Other Assets	23	17
	Stock-based Compensation Expense	28	-
	Tax Effect of Stock Options Exercised	21	20
	Changes in Operating Assets and Liabilities:
	Accounts Receivable - Net	(36)	(21)
	Merchandise Inventory	(1,038)	(540)
	Other Operating Assets	(41)	19
	Accounts Payable	599	331
	Employee Retirement Plans	(35)	16
	Other Operating Liabilities	389	573
	Net Cash Provided by Operating Activities	2,037	2,035
Cash Flows from Investing Activities:
	Decrease (Increase) in Investment Assets:
	Short-Term Investments	144	(24)
	Purchase of Long-Term Investments	(282)	(2)
	Proceeds from Sale/Maturity of Long-Term Investments	189	-
	Increase in Other Long-Term Assets	(87)	(22)
	Fixed Assets Acquired	(1,685)	(1,449)
	Proceeds from the Sale of Fixed and Other Long-Term Assets	50	29
	Net Cash Used in Investing Activities	(1,671)	(1,468)
Cash Flows from Financing Activities:
	Net Decrease in Short-Term Borrowings	(50)	(50)
	Repayment of Long-Term Debt	(21)	(45)
	Proceeds from Stock Options Exercised	111	81
	Cash Dividend Payments	(63)	(47)
	Net Cash Used in Financing Activities	(23)	(61)
Net Increase in Cash and Cash Equivalents		343	506
Cash and Cash Equivalents, Beginning of Period		853	799
Cash and Cash Equivalents, End of Period		$         1,196	$         1,305
See accompanying notes to unaudited consolidated financial statements.

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Lowe's Companies, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation - The accompanying Consolidated Financial Statements (unaudited) have been reviewed by independent certified public accountants and, in the opinion of management, they contain all adjustments necessary to present fairly the financial position as of October 31, 2003, and November 1, 2002, the results of operations for the three and nine months ended October 31, 2003 and November 1, 2002, and cash flows for the nine months ended October 31, 2003 and November 1, 2002.

These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Lowe's Companies, Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended January 31, 2003. The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Note 2: Earnings Per Share - Basic earnings per share ("EPS") excludes dilution and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated based on the weighted average shares of common stock as adjusted for the potential dilutive effect of stock options and convertible notes at the balance sheet date. The dilutive effect of the assumed conversion of the $580.7 million Senior Convertible Notes, issued in October 2001, has been excluded from diluted earnings per share for the three and nine months ended October 31, 2003 and November 1, 2002 because none of the conditions that would permit conversion had been satisfied during the period. The calculation is detailed below (in millions, except per share data):

		Three Months Ended		Nine Months Ended
		October 31, 2003	November 1, 2002	October 31, 2003	November 1, 2002
Net earnings		$     452	$    339	$     1,469	$     1,152
Weighted average common shares outstanding		786	781	784	779
Basic earnings per share		$    0.58	$    0.44	$    1.87	$    1.48
Net earnings		$    452	$    339	$    1,469	$    1,152
Tax-effected interest expense attributable to 2.5% convertible notes		3	3	8	8
Net earnings assuming dilution		$   455	$    342	$   1,477	$   1,160
Weighted average common shares outstanding		786	781	784	779
Effect of potentially dilutive securities:
	2.5% convertible notes	17	16	17	17
	Employee stock option plans	5	4	4	4
Weighted average common shares assuming dilution		808	801	805	800
Diluted earnings per share		$    0.56	$    0.43	$    1.84	$    1.45

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Note 3: Property - Property is shown net of accumulated depreciation of $3.0 billion at October 31, 2003, $2.4 billion at November 1, 2002 and $2.5 billion at January 31, 2003.

Note 4: Supplemental Disclosure

Supplemental disclosures of cash flow information (in millions):

	Nine Months Ended
	October 31, 2003	November 1, 2002
Cash paid for interest (net of amount capitalized)	$      168	$      172
Cash paid for income taxes	726	512
Non-cash investing and financing activities:
Common stock issued to ESOP	-	79
Fixed assets acquired under capital lease	-	15

Note 5: Credit Arrangements - The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006, and a $400 million 364-day tranche, expiring in July 2004, which is renewable annually. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Borrowings made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants, including maintenance of a specific financial ratio. The Company was in compliance with these covenants at October 31, 2003. Fifteen banking institutions are participating in the $800 million senior credit facility and as of October 31, 2003, there were no outstanding loans under the facility.

In July 2003, the Company terminated a $100 million revolving credit and security agreement with a financial institution, which was scheduled to expire in November 2003.  The remaining outstanding balance of $50 million was repaid at the time of termination.

Note 6: Comprehensive Income - Total comprehensive income, comprised of net earnings and unrealized holding gains (losses) on available-for-sale securities, was $451.9 and $339.1 million compared to net earnings of $451.7 and $339.2 million for the three months ended October 31, 2003 and November 1, 2002, respectively.  Total comprehensive income was $1,468.7 and $1,151.9 million compared to net earnings of $1,469.0 and $1,152.1 million for the nine months ended October 31, 2003 and November 1, 2002, respectively.

Note 7: Accounting for Stock-Based Compensation - The Company has three stock incentive plans which are described more fully in Note 9 to the consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003. Prior to fiscal 2003, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Therefore, no stock-based employee compensation is reflected in fiscal 2002 net income, as all options granted under those plans had an exercise price equal to

the market value of the underlying common stock on the date of grant.

Effective February 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," prospectively for all employee awards granted, modified or settled after January 31, 2003. Therefore, in accordance with the requirements of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended October 31, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. During the three and nine months ended October 31, 2003, the Company recognized compensation expense totaling $13.0 million and $27.9 million, respectively, relating to stock options and awards granted in that period, which generally vest over three years.

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The fair value of each option grant is estimated using the Black-Scholes option pricing model.  The assumptions used to determine the fair value of options granted during the nine months ended October 31, 2003 have not changed significantly from those disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2003.  The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

(In millions, except per share data)
	Three Months Ended		Nine Months Ended
	October 31, 2003	November 1, 2002	October 31, 2003	November 1, 2002
Net income, as reported	$    452	$    339	$    1,469	$    1,152
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards net of related tax effects not reported in net income	(15)	(21)	(46)	(63)
Pro forma net income	437	318	1,423	1,089
Earnings per share:
Basic - as reported	$    0.58	$    0.44	$    1.87	$    1.48
Basic - pro forma	$    0.56	$    0.41	$    1.81	$    1.40
Diluted - as reported	$    0.56	$    0.43	$    1.84	$    1.45
Diluted - pro forma	$    0.54	$    0.40	$    1.78	$    1.37

Note 8: Recent Accounting Pronouncements - In November 2002, the Emerging Issues Task Force ("EITF") issued EITF 02-16, 

"Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." EITF 02-16 provides guidance 

for classification in the reseller's income statement for various circumstances under which cash consideration is received from a vendor by a 

reseller. In addition, the issue also provides guidance concerning how cash consideration relating to rebates or refunds should be recognized 

and measured. This standard became effective for the Company for all vendor reimbursement agreements entered into or modified after 

December 31, 2002.

The Company has historically treated volume related discounts or rebates as a reduction of inventory cost and reimbursements of operating 

expenses received from vendors as a reduction of those specific expenses. The Company's historical accounting treatment for these vendor 

provided funds is consistent with EITF 02-16 with the exception of certain cooperative advertising allowances and in-store service funds 

provided by third parties for which the costs are ultimately funded by vendors. The Company previously treated the cooperative advertising 

allowances and in-store service funds as a reduction of the related expense. Under EITF 02-16, cooperative advertising allowances and 

in-store service funds should be treated as a reduction of inventory cost unless they represent a reimbursement of specific, incremental, and 

identifiable costs incurred by the customer to sell the vendor's product. 

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The Company reviewed its cooperative advertising agreements in order to determine if any of these funds would meet the specific, incremental 

and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense.  These agreements do not 

include proof of performance or specific substantiation requirements.  The agreements with the Company's vendors provide funds for general 

Company advertising to drive customer traffic, which in turn, increases sales of the vendors' products.  Based on this analysis of our vendor 

agreements and the guidance set forth in EITF 02-16, the Company believes that treating cooperative advertising funds as a reduction in the 

cost of inventory and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with EITF 02-16.

The Company reviewed its third party in-store service agreements in order to determine if any of these funds would meet the specific, 

incremental and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense.  These agreements 

with the Company's vendors provide funds for third parties to provide general merchandising functions within the Company's retail stores.  

In analyzing third party in-store service funds, the Company determined that third party vendors providing these in-store services were 

servicing multiple areas and products within the Company's retail stores. Neither we, nor the third party service providers have the ability 

to specifically identify time spent on a merchandise vendor's products in multiple locations and match them to specific funds from merchandise 

vendors.  Based on this analysis and the guidance set forth in EITF 02-16, the Company believes that treating third party in-store service funds 

as a reduction in the cost of inventory and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with 

EITF 02-16.  

The Company does not expect this accounting change to have a material impact on the fiscal 2003 financial statements since substantially all 

of the cooperative advertising allowance agreements and in-store service reimbursement agreements for fiscal 2003 were entered into prior 

to December 31, 2002.  The Company estimates that this one time change in accounting will reduce fiscal 2004 EPS by approximately 

$0.12 per share and fiscal 2005 EPS by approximately $0.01 per share.  The $0.01 per share impact in fiscal 2005 represents the estimated 

growth in cooperative advertising allowances and in-store service funds from fiscal 2004 to fiscal 2005.  This reflects the cooperative 

advertising allowances and in-store service funds capitalized into inventory in 2005 less the $0.12 impact from 2004 that will be recognized 

in 2005 as the inventory is sold.  There will be no impact on the Company's cash flows or the expected amount of funds to be received from 

vendors.  The earnings impact of EITF 02-16 recognized in fiscal 2004 will not be recurring in subsequent years.  Earnings in these 

subsequent years would be impacted only by future net changes in cooperative advertising programs and in-store service funds.

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of 

Variable Interest Entities, an interpretation of ARB 51."  FIN 46 provides guidance on the identification and consolidation of variable interest 

entities, or VIEs, which are entities for which control is achieved through means other than through voting rights. The provisions of FIN 46 

are required to be applied to VIEs created or in which the Company obtains an interest after January 31, 2003.  For VIEs in which the 

Company holds a variable interest that it acquired before February 1, 2003, the provisions of FIN 46 are effective for the fourth quarter of 

2003. Due to the ongoing deliberations and clarifications by the FASB, we are still assessing the provisions of FIN 46.  However, the 

Company does not expect the adoption of FIN 46 in the fourth quarter of 2003 to have a material impact on its financial position, results of 

operations or cash flows.

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In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 

No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and 

for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except in 

certain instances stated within SFAS No. 149 and for hedging relationships designated after June 30, 2003. The initial adoption of this standard 

did not have a material impact on the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and 

Equity." SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as 

equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. This Statement is effective 

for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period 

beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non public entities. The initial adoption of this 

standard did not have a material impact on the Company's financial statements.

Note 9: Subsequent Event- On November 20, 2003, the Company entered into a definitive agreement to sell 26 commodity-focused locations 

operating under The Contractor Yard banner (the "Contractor Yards").   The sale is expected to close in the fourth quarter of fiscal 2003.   

Total assets included in the balance sheets relating to the Contractor Yards at October 31, 2003, November 1, 2002 and January 31, 2003 

were approximately $122 million, $103 million and $98 million, respectively.  Total liabilities included in the balance sheets relating to the 

Contractor Yards at October 31, 2003, November 1, 2002 and January 31, 2003 were approximately $25 million, $23 million and $21 

million, respectively.  The gain or loss associated with the Contractor Yard transaction is not expected to exceed $0.01 in diluted earnings 

per share.  The Company expects to account for this disposition as a discontinued operation in the fourth quarter of 2003.

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INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors and Stockholders of Lowe's Companies, Inc.  

We have reviewed the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of 

October 31, 2003 and November 1, 2002, and the related consolidated statements of current and retained earnings for the three-month and 

nine-month periods then ended, and cash flows for the nine-month periods ended October 31, 2003 and November 1, 2002.  These interim 

financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants.  A review of 

interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible 

for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with auditing standards generally 

accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a 

whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated financial statements for them 

to be in conformity with accounting principles generally accepted in the United States of America.
	

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance 

sheet of Lowe's Companies, Inc. and subsidiaries as of January 31, 2003, and the related consolidated statements of earnings, shareholders' 

equity, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 2003, we expressed an unqualified 

opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as 

of January 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in Note 7 to the consolidated interim financial statements, the Company has changed its method of accounting for stock-based 

compensation effective February 1, 2003.

DELOITTE & TOUCHE LLP

Charlotte, North Carolina
November 24, 2003

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes the significant factors affecting the Company's consolidated operating results, liquidity and capital resources during 

the three and nine months ended October 31, 2003. This discussion should be read in conjunction with the financial statements and financial 

statement footnotes that are included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003.

FORWARD-LOOKING STATEMENTS

The Company's quarterly report on Form 10-Q to be filed with the Securities and Exchange Commission talks about the future, particularly in 

the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations." While the Company believes these 

expectations are reasonable, the Company cannot guarantee them and this should be considered when thinking about statements made that are 

not historical facts. Some of the things that could cause actual results to differ substantially from expectations are:

(1) The Company's sales are dependent upon the general geopolitical environment and economic health of the country, variations in the number 

of new housing starts and existing home sales, the level of repairs, remodeling and additions to existing homes, commercial building activity, and 

the availability and cost of financing. An economic downturn affecting consumer confidence in making housing and home improvement 

expenditures could affect sales because a portion of the Company's inventory is purchased for discretionary projects, which can be delayed.

(2) The Company's expansion strategy may be impacted by environmental regulations, local zoning issues and delays, availability and 

development of land, and more stringent land use regulations than traditionally experienced as well as the availability of sufficient labor to facilitate 

growth.

(3) Many of the Company's products are commodities whose prices fluctuate within an economic cycle, a condition especially true of lumber 

and plywood.

(4) The Company's business is highly competitive, and as it expands into new markets the Company may face new forms of competition, which 

do not exist in some of the markets traditionally served.

(5) The ability to continue the everyday competitive pricing strategy and provide the products that customers want depends on the Company's 

vendors providing a reliable supply of inventory at competitive prices.

(6) On a short-term basis, weather may affect sales of product groups like nursery, lumber, building materials and seasonal products.

(7)  The risk that the Company does not close The Contractor Yard transaction.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of the results of operations and financial condition are based on the Company's financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, the results 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.

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The Company's significant accounting polices are described in Note 1 to the consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003. Management believes that the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements.

Merchandise Inventory

The Company records an inventory reserve for the loss associated with selling discontinued inventories below cost. This reserve is based on management's current knowledge with respect to inventory levels, sales trends and historical experience relating to the liquidation of discontinued inventory. Management does not believe the Company'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. However, changes in consumer purchasing patterns could result in the need for additional reserves. The Company also records an inventory reserve for the estimated shrinkage between physical inventories. This reserve is primarily based on actual shrinkage from previous physical inventories. Changes in actual shrinkage from completed physical inventories could result in revisions to previously estimated shrinkage accruals. Management believes it has sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves.

Vendor Funds

The Company receives funds from vendors in the normal course of business for a variety of reasons including purchase volume rebates, 

cooperative advertising allowances, and third party in-store service related costs. Volume related rebates are recorded based on estimated 

purchase volumes and historical experience and are treated as a reduction of inventory costs at the time of purchase. Vendor funds received 

as a reimbursement of specific, incremental and identifiable costs are recognized as a reduction of the related expense. Cooperative advertising 

allowances and in-store service reimbursements provided by vendors have historically been used to offset the Company's related expense.  

However, under the guidance set forth in Emerging Issues Task Force (EITF) 02-16, "Accounting by a Customer (Including a Reseller) for 

Certain Consideration Received From a Vendor," cooperative advertising allowances and in-store service funds should be treated as a reduction 

of inventory cost unless they represent a reimbursement of specific, incremental, and identifiable costs incurred by the customer to sell the 

vendor's product. 

The Company reviewed its cooperative advertising agreements in order to determine if any of these funds would meet the specific, incremental 

and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense.  These agreements do not include 

proof of performance or specific substantiation requirements.  The agreements with the Company's vendors provide funds for general Company 

advertising to drive customer traffic, which in turn, increases sales of the vendors' products.  Based on this analysis of our vendor agreements 

and the guidance set forth in EITF 02-16, the Company believes that treating cooperative advertising funds as a reduction in the cost of inventory 

and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with EITF 02-16.

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The Company reviewed its third party in-store service agreements in order to determine if any of these funds would meet the specific, 

incremental and identifiable criteria in EITF 02-16 and would therefore qualify for direct offset against the related expense.  These agreements 

with the Company's vendors provide funds for third parties to provide general merchandising functions within the Company's retail stores.  In 

analyzing third party in-store service funds, the Company determined that third party vendors providing these in-store services were servicing 

multiple areas and products within the Company's retail stores. Neither we, nor the third party service providers have the ability to specifically 

identify time spent on a merchandise vendor's products in multiple locations and match them to specific funds from merchandise vendors.  Based 

on this analysis and the guidance set forth in EITF 02-16, the Company believes that treating third party in-store service funds as a reduction in 

the cost of inventory and recognizing these costs as a reduction of cost of sales when the inventory is sold complies with EITF 02-16.

The Company does not expect this accounting change to have a material impact on the fiscal 2003 financial statements since substantially all of 

the cooperative advertising allowance agreements and in-store service reimbursement agreements for fiscal 2003 were entered into prior to 

December 31, 2002.

Self-Insurance

The Company is self-insured for certain losses relating to worker's compensation, automobile, general and product liability claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to adequately record estimated losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities.

Stock-Based Compensation

The Company has three stock incentive plans which are described more fully in Note 9 to the consolidated financial statements presented in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003. Prior to fiscal 2003, the Company accounted for these plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation is reflected in 2002 net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective February 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," prospectively for all employee awards granted, modified or settled after January 31, 2003. Therefore, in accordance with the requirements of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended October 31, 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. See Note 7 to the Consolidated Financial Statements in this Form 10-Q for further description and disclosures in accordance with the requirements of SFAS No. 148.

OPERATIONS

For the third quarter of fiscal 2003, sales increased 23.5% to $7.9 billion, comparable store sales for the quarter increased 12.4%, and net 

earnings rose 33.3% to $451.7 million compared to last year's third quarter results. Diluted earnings per share were $0.56 compared to $0.43 

for the comparable quarter of last year.  For the nine months ended October 31, 2003, sales increased 17.4% to $23.9 billion, comparable 

store sales increased 6.5%, and net earnings rose 27.5% to $1.5 billion compared to the first nine months of fiscal 2002. Diluted earnings per 

share increased 26.9% to $1.84 per share over the same period a year ago. 

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The sales increase during the third quarter and first nine months of 2003 was primarily attributable to the addition of 12.9 million square feet of 

retail selling space relating to new and relocated stores since last year's third quarter, as well as the increase in comparable store sales.   Sales in 

the third quarter benefited from favorable weather that allowed the continuation of outdoor projects through the late summer and into the fall.  In 

addition, increases in the wholesale prices of lumber and plywood during the quarter had a positive impact on sales in the quarter.  Consumer 

disposable income increased due to lower Federal individual tax withholding rates and the Federal tax rebates distributed during July and August.

Further, purchases to prepare for and to repair damages caused by Hurricane Isabel in the mid-Atlantic region contributed to increased third 

quarter sales.  Both customer traffic and average ticket improved significantly in the third quarter. 

Several product categories generated above average performance during the third quarter, including lumber, building materials, seasonal living, 

outdoor power equipment and home organization. Millwork, cabinets and appliances performed at approximately the overall corporate average.

Gross margin was 31.1% of sales for the quarter ended October 31, 2003 compared to 30.6% for last year's comparable quarter. Gross margin 

for the nine months ended October 31, 2003 was 30.7% versus 29.9% for the first nine months of 2002.  The increase in the margin rate for the 

third quarter is primarily due to better margin rates driven by lower inventory costs and lower inventory shrinkage, partially offset by negative 

product mix.  The increase in the margin rate for the first nine months of 2003 is primarily due to lower inventory shrinkage and better margin 

rates driven by lower inventory costs.

Selling, general and administrative expenses ("SG&A") were 18.5% of sales versus 18.6% in last year's third quarter. SG&A increased by 

23.0% compared to the 23.5% increase in sales for the quarter. The leveraging during the third quarter was primarily due to lower payroll and 

occupancy costs as a percentage of sales for fiscal 2003 as compared to fiscal 2002, partially offset by increased bonus estimates, insurance 

costs and compensation expense relating to stock options recognized in the current quarter.  During the first nine months of 2003, SG&A was 

17.6% of sales, versus 17.5% for the same period in the prior year.  This de-leveraging was primarily caused by compensation expense relating 

to stock options recognized in the first nine months of 2003 of approximately $28 million, which resulted from the adoption of the fair value 

recognition provisions of SFAS No. 123 prospectively for all employee awards granted or modified after January 31, 2003, as previously 

discussed in Note 7 to the Consolidated Financial Statements. 

Store opening costs were $37 million for the quarter ended October 31, 2003 compared to $28 million last year. This represents costs 

associated with the opening of 38 stores during the current year's third quarter (36 new and 2 relocated) compared to 18 new stores for the 

comparable period last year. Charges in the third quarter of 2003 and 2002 for future and prior openings were $5 million and $7 million, 

respectively.  Store opening costs for the nine months ended October 31, 2003 were $82 million, compared to $88 million last year.  These 

costs were associated with the opening of 83 stores during the first nine months of 2003 (79 new and 4 relocated), compared to 86 stores 

during the first nine months of 2002 (81 new and 5 relocated). The Company's 2003 expansion plans are discussed under "Liquidity and 

Capital Resources" below.

Depreciation was $193 million and $557 million for the quarter and nine months ended October 31, 2003, respectively.  This represents an 

increase of 21.4% and 21.6% over comparable periods last year.  The increase is primarily due to the addition of buildings, fixtures, displays 

and computer equipment relating to the Company's ongoing expansion program, the purchase of all the Company's financing leases and the 

increase in the percentage of owned locations since last year's third quarter. At the end of the current year's third quarter, the Company owned 

78% of total locations compared to 74% in the prior year's third quarter.

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Interest expense was $42 million for the quarter ended October 31, 2003, compared to $44 million last year.  For the nine months ended 

October 31, 2003 and November 1, 2002, interest expense totaled $136 million and $137 million, respectively.  

The Company's effective income tax rate was 37.8% for the quarter and nine months ended October 31, 2003, respectively, compared to 

37.5% and 37.4% for last year's comparable periods, respectively. The higher rate during 2003 is primarily related to expansion into states with 

higher income tax rates.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the Company's significant contractual obligations as of October 31, 2003.

Contractual Obligations	Payments Due by Period
(In millions)	Total	Less than 1 year	1-3 years	4-5 years	After 5 years
Long-term debt (net of discount)	$  3,775	$       55	$       616	$       68	$  3,036
Capital lease obligations	785	61	119	118	487
Operating leases	3,296	215	424	418	2,239
Total contractual cash obligations	$  7,856	$     331	$   1,159	$     604	$  5,762

The primary sources of liquidity are cash flows from operating activities and various lines of credit currently available to the Company. Net cash 

provided by operating activities was $2.0 billion for the nine months ended October 31, 2003 and November 1, 2002. The primary source of 

cash provided by operating activities in the current year was net earnings. Working capital at October 31, 2003 was $2.4 billion compared to 

$2.2 billion at November 1, 2002 and $2.0 billion at January 31, 2003.

The primary component of net cash used in investing activities continues to be new store facilities in connection with the Company's expansion 

plan. Cash acquisitions of fixed assets were $1.7 billion and $1.4 billion for the nine months ended October 31, 2003 and November 1, 2002, 

respectively. At October 31, 2003, the Company operated 932 stores in 45 states with 103.7 million square feet of retail selling space, a 14.2% 

increase over the selling space as of November 1, 2002.

Cash flows used in financing activities were $23 million and $61 million for the nine months ended October 31, 2003 and November 1, 2002, 

respectively. Cash used in financing activities during the first nine months of the current and prior year primarily resulted from cash dividend 

payments, short-term debt repayments, and scheduled long-term debt repayments offset by proceeds generated from stock option exercises. 

The ratio of long-term debt to equity plus long-term debt was 27.2%, 32.0% and 31.0% as of October 31, 2003, November 1, 2002 and 

January 31, 2003, respectively.

The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a 

$400 million 364-day tranche, expiring in July 2004, which is renewable annually. The facility is used to support the Company's $800 million 

commercial paper program and for short-term borrowings. Any loans made are priced based upon market conditions at the time of funding in 

accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants, including maintenance of a 

specific financial ratio. The Company was in compliance with these covenants at October 31, 2003. Fifteen banking institutions are participating 

in the $800 million senior credit facility and, as of October 31, 2003, there were no outstanding loans under the facility.

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In July 2003, the Company terminated a $100 million revolving credit and security agreement with a financial institution, which was scheduled to 

expire in November 2003.  The remaining outstanding balance of $50 million was repaid at the time of termination.  

The Company's 2003 capital budget is $2.9 billion, inclusive of approximately $181 million of operating or capital leases. Approximately 80% of 

this planned commitment is for store expansion and new distribution centers. Expansion plans for 2003 consist of 130 stores, including 5 

relocations of older stores. This planned expansion is expected to increase sales floor square footage by approximately 15%. Approximately 

18% of the 2003 projects will be ground leased properties and 82% will be owned. At October 31, 2003, the Company operated 9 regional 

distribution centers. In February 2003, the Company began construction on an additional regional distribution center located in Poinciana, 

Florida, which is expected to be operational in the third quarter of 2004.  The Company plans to begin construction on an additional regional 

distribution center in Plainfield, Connecticut in fiscal 2004.  The Company also expects to open 3 additional flatbed network facilities in 2003 

for the handling of lumber, building materials and long-length items.

The Company believes that funds from operations, leases and existing short-term lines of credit will be adequate to finance the 2003 expansion 

plan and other operating requirements. However, general economic downturns, fluctuations in the prices of products, unanticipated impact 

arising from competition and adverse weather conditions could have an effect on funds generated from operations and our expansion plans. 

In addition, the availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating 

downgrade or a deterioration of certain financial ratios. There are no provisions in any agreements that would require early cash settlement of 

existing long-term debt or leases as a result of a downgrade in the Company's debt rating or a decrease in the Company's stock price. Holders 

of the Company's $580.7 million Senior Convertible notes may convert their notes into the Company's common stock during any period that the 

credit rating assigned to the notes is Baa3 or lower by Moody's, BBB or lower by Standard & Poor's or BBB or lower by Fitch.

Current Debt Ratings	S&P	Moody's	Fitch
Commercial paper	A1	P2	F1
Senior debt	A	A3	A
Outlook	Positive	Positive	Stable

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the EITF issued EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received 

from a Vendor." EITF 02-16 provides guidance for classification in the reseller's income statement for various circumstances under which 

cash consideration is received from a vendor by a reseller. In addition, the issue also provides guidance concerning how cash consideration 

relating to rebates or refunds should be recognized and measured. This standard became effective for the Company for all vendor 

reimbursement agreements entered into or modified after December 31, 2002. See Note 8 to the Consolidated Financial Statements for 

further description of the estimated impact of EITF 02-16.

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In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB 51."  FIN 46 provides 

guidance on the identification and consolidation of variable interest entities, or VIEs, which are entities for which control is achieved through 

means other than through voting rights. The provisions of FIN 46 are required to be applied to VIEs created or in which the Company obtains 

an interest after January 31, 2003.  For VIEs in which the Company holds a variable  interest that it acquired  before February 1, 2003, the 

provisions of FIN 46 are effective for the fourth quarter of 2003. Due to the ongoing deliberations and clarifications by the FASB, we are still 

assessing the provisions of FIN 46.  However, the Company does not expect the adoption of FIN 46 in the fourth quarter of 2003 to have a 

material impact on its financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities."  SFAS 

No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and 

for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except in 

certain instances stated within SFAS No. 149 and for hedging relationships designated after June 30, 2003. The initial adoption of this standard 

did not have a material impact on the Company's financial statements

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and 

Equity."  SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as 

equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. This Statement is effective 

for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period 

beginning after June 15, 2003, except for mandatorily redeemable financial instruments of non public entities. The initial adoption of this standard 

did not have a material impact on the Company's financial statements

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Item 3 - Quantitative and Qualitative Disclosures about Market Risk

As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2003, the Company's major market risk exposure is the potential loss arising from the impact of changing interest rates on long-term debt. The Company's policy is to monitor the interest rate risks associated with this debt, and the Company believes any significant risks could be offset by variable rate instruments available through the Company's lines of credit. The Company's market risk has not changed materially since January 31, 2003. Please see the tables titled "Long-term Debt Maturities by Fiscal Year" on page 23 of the Annual Report on Form 10-K for the fiscal year ended January 31, 2003.

Item 4 - Controls and Procedures

The Company has designed and maintains disclosure controls and procedures to ensure that information required to be disclosed in its reports 

filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the 

Commission's rules and forms. These controls and procedures are also designed to ensure that such information is communicated to the 

Company's management, including its Chief Executive and Chief Financial Officers as appropriate, to allow them to make timely decisions 

about required disclosures.

The Company's management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness 

of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based on that evaluation, which was conducted as of the end 

of the period covered by this report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer concluded that disclosure controls 

and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries)

required to be included in its periodic SEC filings.  

There has been no change in the Company's internal control over financial reporting during the quarter ended October 31, 2003 that has 

materially affected, or is reasonably likely to materially affect, internal control over financial reporting. 

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Part II - OTHER INFORMATION

Item 6 (a) - Exhibits

Exhibit 3(ii) - Bylaws of Lowe's Companies, Inc., as amended and restated September 11, 2003

Exhibit 31.1 - Certification Pursuant Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the 

Sarbanes-Oxley Act of 2002

Exhibit 32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the 

Sarbanes-Oxley Act of 2002

Refer to the Exhibit Index on page 22.

Item 6 (b) - Reports on Form 8-K

Current Report on Form 8-K filed August 18, 2003, furnishing under Item 12 thereof the News Release announcing the financial results for the Company's second quarter ended August 1, 2003.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by

the undersigned thereunto duly authorized.

	LOWE'S COMPANIES, INC.
December 9, 2003 Date	/s/Kenneth W. Black, Jr. Kenneth W. Black, Jr. Senior Vice President and Chief Accounting Officer

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 EXHIBIT INDEX

Exhibit No.	Description
3(ii)	Bylaws of Lowe's Companies, Inc., as amended and restated September 11, 2003
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.