PART IV
EXHIBIT 13
Pages 1 - 3:
Dear Shareholders:
1996 was Lowe's Golden Anniversary year, and we celebrated by working
successfully to make it the very best year in Lowe's history.
Sales were $8.6 billion, up from $7.1 billion in 1995--a 22% increase
which shows the impact of 66 new large stores and of merchandising initiatives
which yielded a comparable store sales increase of 7%. Earnings per share grew
to $1.71, up 26% from last year's $1.36. In the Nineties so far, we have
achieved a compound sales growth rate of 20% and compound earnings per share
growth of 24%. Sales and earnings growth of more than twenty percent-- now
that's a celebration that all Lowe's shareholders can enjoy!
The Power of One
Once a year, Lowe's store managers gather from every compass point to
meet with corporate merchants and marketing staff, review the events of the
past year, and make plans for the year ahead. As Lowe's grows toward our
millennial goal of 600 stores, our annual gathering gets larger and larger.
It is increasingly impressive to realize that each store manager runs a unique
operation, yet they all share a primary objective: to make Lowe's the
acknowledged leader at providing products to build, improve, and maintain
American homes.
The theme of this year's meeting was "The Power of One." It emphasized
not only the ability of each individual to make a difference, but also the
strength we find when we work together as one, with one common purpose.
For Our Customers
America is now in its sixth year of economic expansion. Unemployment
figures are the lowest in a decade; inflation is the lowest it's been in three
decades; interest rates are low and relatively stable. Yet despite this
encouraging context, the pace of retail sales remains modest. Why? Because
Americans are anxious about their financial future.
Leading-edge Baby Boomers are turning fifty now, and they are starting to
think seriously about retirement. They're concerned about the Social Security
system and health-related costs. They know they need to get their financial
houses in order. Meanwhile, Generation X is coming on board with great
potential but also with great uncertainty and its own causes for concern. The
job market is not the cornucopia for them that it was for Boomers: although
there are jobs out there, there seem to be fewer good ones.
All this explains-and justifies-the consumer's obsession with value. Value
doesn't just mean low prices. In focus groups and in our stores today, we're
hearing that our customers "want it all." They want, expect, and deserve
nothing less than low prices, large selections, quality merchandise, and great
service. That's the definition of value, and we've made it the recipe for our
enduring goal of Superior Customer Satisfaction.
To achieve Superior Customer Satisfaction, we have to "give it all"
without giving it all away. As a dedicated low-cost operator, our strategy is
to lower operating costs as a percent of sales, which will enable us to lower
our retail prices. Lower prices will bring us more customers, which will
increase sales and allow us to lower prices even more. To deliver not just
price but the other components of value as well, we are focused on leveraging
our investment in our store facilities, our technical systems, and our people.
For Our Suppliers
Lowe's transformation into a chain of large stores continued in 1996, and
we finished the year with 30.4 million square feet of selling space--an
incremental gain of 27%. of the 402 stores in our chain at yearend, 317 were
built in this decade. Large stores (80,000 square feet and up, which lead
Lowe's growth in sales and profitability, now number 224 units and represent
78.5% of our total square footage. These stores accounted for 61% of sales and
53% of operating profits, which is particularly satisfying because most of the
new store projects completed in 1996 were in new markets, which generally take
longer than relocations to reach our goals for profitability.
In 1997, we will complete 60 to 65 new store projects. Between 40 and 45
of these will be new stores in new markets, taking Lowe's product selection
to millions of new consumers. More than 80% of our $1.2 billion capital budget
for 1997 will be dedicated to funding this expansion.
Lowe's Supplier of the Year awards recognize manufacturers who contribute
to Lowe's success through product development, marketing, packaging,
distribution, and support services. At the National Hardware Show in Chicago
last summer, we announced that our Suppliers of the Year were Valspar Paint;
Pennington Seed; DeVilbiss Air Power Company; The Spectrum Group (United
Industries; NHB Industries; Canfor; Bretlin, Inc.; and Weiser Lock. The
President's Award for overall excellence went to DeVilbiss Air Power.
We congratulate and thank these vendor partners, and we encourage all of
Lowe's vendors to emulate their teamwork--and their success!
For Our Communities
A Lowe's store is more than just a big box stuffed with merchandise. It is
a place for people to work and build careers, an information center for home
owners and home improvers at every level of expertise, and a responsible
corporate citizen backed by a fifty-year tradition of neighborliness and
community involvement that doesn't stop at the edge of the parking lot.
Since 1957, Lowe's Charitable and Educational Foundation has given a
helping hand in communities where Lowe's operates. With the participation of
Lowe's store managers, the foundation consolidates funds from all our stores
and distributes them back to local communities in the form of grants to
qualified recipients. The foundation has disbursed millions of dollars to
thousands of deserving organizations and institutions, and the good work
continues.
In 1993, we founded Lowe's Home Safety Council (LHSC) to help American
families make home life safer and more secure for their loved ones. Forging an
alliance with home center suppliers and other national safety organizations,
the LHSC has used innovative methods to educate and motivate consumers. High-
profile safety makeovers, Safety Watch kiosks in all Lowe's stores, and "Home
Watch" television specials on Home & Garden Television are just a few of the
LHSC's successful safety programs.
For Our Employees
Lowe's employees numbered 54,000 at the end of 1996, and there will be at
least l0,000 more by this time next year. As an employer, Lowe's is proud to
offer skills training and career development options that far exceed the norm
in our industry. our new "Lowe's University" is putting employees on the fast
track to promotion within our organization, encouraging them in the vision of
a career where they might have seen only a job.
Employee stock ownership has been a major part of Lowe's corporate culture
for decades. Every new person we hire becomes eligible for ESOP membership
following the completion of one year's work, and we closed 1996 with more than
30,000 employee-owners motivated and dedicated to Lowe's growth and progress,
knowing that corporate success and personal success are intertwined.
Last July, in another major augmentation of our executive management team, we
welcomed Tom Whiddon to Lowe's as executive vice president and chief financial
officer.
In August, Leonard Herring retired as president and chief executive officer.
He was Lowe's most senior employee, having joined as our first financial
officer in 1955. After the death of Lowe's founder, Carl Buchan, Leonard served
on Lowe's Executive Committee and played a pivotal role in taking the company
public. He is a founding member of Lowe's Board of Directors, and was a member
of the office of the President until a vote of the board made him president and
CEO in 1978.
He led our company through years of dynamic change and growth. He can be
succeeded, but he can never be replaced.
To learn more about the history of Lowe's, you may send in the request
form for our book, No Place Like Lowe's, inserted at page 16.
For our Shareholders
Lowe's first shareholders were a handful of employees who helped finance
Lowe's early expansion one store at a time. Since the company went public in
1961, share ownership has made thousands of friends for Lowe's all over the
world.
The table at the top of the next column shows what has happened to l00
shares of Lowe's stock bought for $12.25 per share on the initial offering
date
in 1961 and held as a long-term investment. At $38 per share, 12,000 shares
have a market value of $456,000, or 372 times the original investment.
The graph inside our front cover reveals that in terms of total return to
shareholders, Lowe's five-year annual compound growth rate at the end of 1996
exceeded the Standard & Poor's 500 average by l0% and the S&P Retail Index by
20%.
The graph plots the curve of a growth company, not what you'd expect from
a fifty-year-old retailer. Lowe's is fifty years old, but as a big-box
retailer we are only one-tenth that age. In fact, 86% of our total
Shares Total
Date Action Received Shares
Oct. 1961 Bought 100 shares 100 100
May 1966 100% Dividend (2 for 1) l00 200
Nov. 1969 Stock Split (2 for 1) 200 400
Dec. 1971 50% Dividend (3 for 2) 200 600
Aug. 1972 331/3% Dividend (4 for 3) 200 800
June 1976 50% Dividend (3 for 2) 400 1,200
Oct. 1981 50% Dividend (3 for 2) 600 1,800
Apr. 1983 66 2/3% Dividend (5 for 3) 1,200 3,000
June 1992 100% Dividend (2 for 1) 3,000 6,000
Mar. 1994 Stock Split(2 for 1) 6,000 12,000
square footage is new since 1991, when a $71 million restructuring charge
signaled our commitment to becoming a chain of large stores.
In 1996, Gordon Cadwgan, one of the best friends Lowe's has ever had,
retired as a founding member of our board of directors. Two more long-time
esteemed friends and valued colleagues, Pete Kulynych and Senator Russell
Long, will be leaving the board in 1997.
During 1996 we also welcomed two new board members. Jim Halpin is
president and CEO of the successful computer products retailer CompUSA Inc.
He was previously president of HomeBase, and has more than twenty years'
experience in retailing. Paul Fulton is Dean of the Kenan-Flagler Business
School at the University of North Carolina at Chapel Hill. Previously, he was
president of the Sara Lee Corporation, the global packaged food and consumer
products company.
We are proud of the leadership role our board has taken in corporate
governance. For a discussion of governance and the 28 guidelines that our
board has adopted, we invite your attention to pages 14 and 15.
We salute and thank all our partners-in-interest, who have made Lowe's
fiftieth anniversary truly golden. May you find individual satisfaction and
all the fruits of successful teamwork in whatever you undertake.
Cordial good wishes,
Robert L. Strickland Robert L. Tillman
Chairman of the Board President and Chief Executive Officer
North Wilkesboro, NC
Pages 12 and 13:
Lowe's In Our Marketplace
Lowe's has always believed in the importance of market research as a tool
not only to help us to pinpoint our current position in the retailing universe,
but also to help us chart our course into the future. Back in 1972, we said in
our annual report that the role of Lowe's market research was "to perceive
opportunities, to forecast changes, and to measure performance." That role
hasn't changed, although the information gathering techniques of 1996 would
make our 1972 methods seem primitive by comparison.
Our commitment to state-of-the-art market research was confirmed in 1981,
when Lowe's co-founded the Home Improvement Research Institute with other
leaders of our industry. HIRI has since become the authoritative informational
resource for home improvement retailing.
The tables and graphs on these pages have a lot to say about who we are,
where we stand among our current competitors, how we got there, and where
we're headed. In addition, since this is our fiftieth anniversary, we thought
our shareholders might be interested in the following historical factoids:
-In 1946, there were roughly 35 million family households in America. In
the past fifty years, that number has doubled.
-In 1946, nearly half the houses in America lacked complete plumbing; in
some areas, that number exceeded 80%! By 1990, only 1% still lacked plumbing
facilities.
-In 1996, the fuel of choice for home heating was gas. Before 1950, the
most common home heating fuel was coal.
-In the first half of the 20th century, many southern states had very low
home ownership rates. Since 1946, however, such states as Alabama, Georgia,
Louisiana, Mississippi, and South Carolina have experienced a tremendous boom
in home ownership and now rank above the national average of 65%.
-Are Americans more mobile now than they were thirty years ago? According
to the U.S. Census Bureau, renters are more mobile, but homeowners move less
frequently now than they did in 1960.
Pages 18 and 19:
Lowe's Board of Directors
William A. Andres
Director since 1986, age 70. Chairman of Governance Committee, Member of
Compensation Committee and Executive Committee of the Company Previously
Chairman of the Board and Chief Executive officer (1976-1983), Chairman of
Executive Committee (1983-1985) of Dayton Hudson Corporation (Retail Chain),
Minneapolis, Minn. (Mr.Andres retired in September 1985.) Other directorships:
Hannaford Bros., Scarborough, Me., since 1986.
John M. Belk
Director since 1986, age 77. Chairman of Audit Committee, Member
of Compensation Committee and Governance Committee of the Company. Chairman of
the Board, Belk Stores Services, Inc. (Retail Department Stores), Charlotte,
N.C., since 1980. Other directorships: Coca-Cola Bottling Company
Consolidated, Charlotte, N.C., since 1972; Chaparral Steel, Midlothian, Tex.,
since 1987.
Carol A. Farmer
Director since 1994, age 52. Member of Audit Committee, Governance Committee
and Government/Legal Affairs Committee of the Company. President, Carol Farmer
Associates, Inc. (Trend Forecasting and Consulting), Boca Raton, Fla., since
1985. Other directorships: The Sports Authority, Inc., Ft. Lauderdale, Fla.,
since 1995.
Paul Fulton
Director since 1996, age 62. Member of Audit Committee and Governance
Committee of the Company. Dean, Kenan-Flagler Business School, University of
North Carolina, Chapel Hill, N.C., since 1994. President, Sara Lee Corporation
(Manufacturer and Marketer of Consumer Products), Chicago, Ill., 1988-1993.
other directorships: Sonoco Products Company, Hartsville, S.C., since 1989;
NationsBank Corporation, Charlotte, N.C., since 1993; Bassett Furniture
Industries, Inc., Bassett, Va., since 1993; The Cato Corporation, Charlotte,
N.C., since 1994; Winston Hotels, Inc., Raleigh, N.C., since 1994.
James F. Halpin
Director since 1996, age 46. Member of Compensation Committee and Governance
Committee of the Company. President and Chief Executive Officer, CompUSA Inc.
(Computer Superstores), Dallas, Tex. since 1993; President, HomeBase, Irvine,
Cal., (Home Improvement Retail Chain), 1990-1993. Other directorships:
Interphase Corporation, Dallas, Tex., since 1995; Invincible Technologies
Corp., Boston, Mass., since 1995; ToyBiz, Inc., New York, N.Y., since 1995;
Prime Source Building Products, Dallas, Tex., 1995-Feb. 1997.
Leonard G. Herring
Director since 1956, age 69. Lowe's President and Chief Executive Officer
1978-July 1996, (Mr. Herring resigned as President and CEO effective August 1,
1996 and retired as an employee of the Company January 31, 1997), Member of
Executive Committee and Government/Legal Affairs Committee of the Company.
Other directorships: First Union Corporation, Charlotte, N.C., since 1986.
Petro Kulynych
Director since 1952, age 75. Member of Audit Committee, Executive Committee
and Government/Legal Affairs Committee of the Company, having previously
served as Managing Director (1978-1983). (Mr. Kulynych retired in December,
1983.) Other directorships: Local Board, Wachovia Bank of North Carolina,
N.A., North Wilkesboro, N.C., since 1988; Carolina Motor Club, Inc.
Russell B. Long
Director since 1987, age 78. Chairman of Government/Legal Affairs Committee,
Member of Compensation Committee and Governance Committee of the Company.
Partner, Long Law Firm (Attorneys-at-Law), Washington, D.C., since 1988. Other
directorships: Catalyst Vidalia Corp., Vidalia, La., since 1989. Other: Member
of Advisory Board, Metropolitan Life Insurance Company, New York, N.Y. since
1992; United States Senator 1948-1987; Member, Senate Finance Committee 1952-
1987 (Chairman 1965-1981).
Claudine B. Malone
Director since 1995, age 60. Member of Audit Committee, Governance Committee
and Government/Legal Affairs Committee of the Company. President and Chief
Executive Officer, Financial & Management Consulting, Inc., McLean, Va., since
1984. Other directorships: Chairman, Federal Reserve Bank, Richmond, Va.,
since 1996 (Member since 1994); Dell Computer Corporation, Austin, Tex., since
1993; Hannaford Bros., Scarborough, Me., since 1991; Hasbro, Inc., Pawtucket,
R.I., since 1992; Houghton Mifflin, Boston, Mass., since 1982; LaFarge
Corporation, Reston, Va., since 1994; The Limited, Inc., Columbus, Oh.,
since 1982; Mallinckrodt Group Inc., St. Louis, Mo., since 1994; SAlC-Science
Applications International Corporation, San.Diego, Calif., since 1993; Union
Pacific Resources Corporation, Fort Worth, Tex., since 1995.
Robert G. Schwartz
Director since 1973, age 69. Chairman of Compensation Committee, Member of
Audit Committee and Governance Committee of the Company. Director of
Metropolitan Life Insurance Company, New York, N.Y., since 1980, having
previously served as Chairman of the Board (1983-1993), President and Chief
Executive officer (1989-1993) of that company. (Mr. Schwartz retired in March
1993.) Other directorships: Potlatch Corporation, San Francisco, Calif., since
1973; Comsat Corporation, Washington, D.C., since 1986; Mobil Corporation, New
York, N.Y., since 1987; The Reader's Digest Association, Inc., Pleasantville,
N.Y., since 1989; Consolidated Edison Company of New York, New York, N.Y.,
since 1989; Lone Star Industries, Inc., Stamford, Conn., since 1994; Ascent
Entertainment Group, Inc., Denver, Colo., since 1995.
Robert L. Strickland
Director since 1961, age 66. Chairman of the Board since 1978, Chairman of
Executive Committee and Member of Government/Legal Affairs Committee of the
Company. other directorships: Deputy Chairman, Federal Reserve Bank, Richmond,
Va., since 1996; T. Rowe Price Associates, Inc., Baltimore, Md., since 1991;
Hannaford Bros., Scarborough, Me., since 1994.
Robert L. Tillman
Director since 1994, age 53. President and Chief Executive Officer since
August 1996, having previously served as Senior Executive Vice President and
Chief Operating Officer (1994-July 1996) and Executive Vice President -
Merchandising (1991-1994), Member of Executive Committee and Government/Legal
Affairs Committee of the Company. Other directorships: Wachovia Bank of North
Carolina, N.A., Winston-Salem, N.C., since 1995; International Mass Retail
Association, Arlington, Va. since 1996.
Page 20:
Independent Auditors' Report
To the Board of Directors and Shareholders
of Lowe's Companies, Inc.
We have audited the accompanying consolidated balance sheets of Lowe's
Companies, Inc. and subsidiaries as of January 31, 1997, 1996 and 1995, and
the related consolidated statements of current and retained earnings and of
cash flows for the fiscal years then ended. These financial statements are the
responsibility of the Company's management. our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Lowe's Companies, Inc. and
subsidiaries at January 31, 1997, 1996 and 1995, and the results of their
operations and their cash flows for the fiscal years then ended in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Charlotte, North Carolina
February 20, 1997
Audit Committee Chairman's Letter
The Audit Committee of the Board of Directors is composed of the
following six independent directors: John Belk, Chairman, Carol Farmer, Paul
Fulton, Petro Kulynych, Claudine Malone, and Robert Schwartz. The committee
held four meetings during Fiscal 1996.
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility the
committee recommended to the Board of Directors, the engagement of Deloitte &
Touche LLP as the Company's independent public accountants. The committee
discussed with the internal auditors and the independent public accountants
the overall scope and results of their respective audits, their evaluation of
the Company's internal controls, and the overall quality of the Company's
financial reporting. The committee also reviewed the Company's consolidated
financial statements and the adequacy of the Company's internal controls with
management. The meetings were designed to facilitate any private communication
with the committee desired by the internal auditors or independent public
accountants.
John Belk
Chairman, Audit Committee
Management's Responsibility for Financial Reporting
Lowe's management is responsible for the preparation, integrity and fair
presentation of its published financial statements. These statements have been
prepared in accordance with generally accepted accounting principles and, as
such, include amounts based on management's best estimates and judgments.
Lowe's management also prepared the other information included in the annual
report and is responsible for its accuracy and consistency with the financial
statements.
The Company's financial statements have been audited by the independent
accounting firm, Deloitte & Touche LLP which was given unrestricted access to
all financial records and related data. The Company believes that all
representations made to the independent auditors during their audit were valid
and appropriate. Deloitte & Touche's audit report presented here provides an
independent opinion upon the fairness of the financial statements.
The Company maintains a system of internal control over financial
reporting, which is designed to provide reasonable assurance to Lowe's
management and Board of Directors regarding the preparation of reliable
published financial statements. The system includes appropriate divisions of
responsibility, established policies and procedures (including a code of
conduct to foster a strong ethical climate) which are communicated throughout
the Company, and the careful selection, training and development of our
people. Internal auditors monitor the operation of the internal control system
and report findings and recommendations to management and the Board of
Directors, and corrective actions are taken to address control deficiencies
and other opportunities for improving the system as they are identified. The
Board, operating through its audit committee, provides oversight to the
financial reporting process.
Robert L. Tillman Thomas E. Whiddon Richard D. Elledge
President & Exec. VP & Sr. VP &
Chief Executive Officer Chief Financial Officer Chief Accounting
Officer
Pages 21 and 22:
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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, financial condition, and liquidity/cash flows
during the three-year period ended January 31, 1997 (i.e., Fiscal 1996, 1995
and 1994). This discussion should be read in conjunction with the Letter to
Shareholders, financial statements, and financial statement footnotes included
in this annual report.
Net earnings for 1996 were $292.2 million or 3.4% of sales compared to
$226.0 million or 3.2% for 1995; return on beginning assets was 8.2% compared
to 7.3% for 1995; and return on beginning shareholders' equity was 17.6%
compared to 15.9% for 1995. These increases were primarily the result of
record sales and improved gross margin as discussed below.
OPERATIONS
Record sales of $8.6 billion were achieved during 1996, a 22% increase
over 1995 sales of $7.1 billion. Sales for 1995 were 16% higher than 1994
levels. Comparable store sales increased 7% in 1996 and were flat in 1995.
The increases in sales are attributable to the Company's expansion program and
comparable store sales growth. These sales increases are the result of a
strategy employing an expanded inventory assortment, everyday competitive
prices and an emphasis on customer service. The following table presents
sales and store information:
Fiscal
1996 1995 1994 1993
Sales (M) $8,600 $7,075 $6,110 $4,538
Sales Increases 22% 16% 35% 18%
Stores 402 365 336 311
Sales Floor Square Footage (M) 30.4 24.0 18.6 14.2
Average Store Size 76K 66K 55K 46K
Gross margin in 1996 increased to 25.9% from 24.9% in 1995. Both of these
years were an improvement over the 24.8% posted in 1994. In 1996, the
Company's Everyday Competitive Pricing Strategy was maintained with a special
emphasis on careful pricing disciplines. As more large stores open each year,
the expanded merchandise selection has improved gross margin together with the
continued shift from contractor to retail sales. Additionally, the Company
reduced its exposure in lower margin consumer electronics and is in the
process of replacing these items with less seasonal, stronger margin products.
LIFO charges were $1.4 million, $8.3 million and $435 thousand for 1996,
1995 and 1994, reducing gross margins by 1, 12 and 1 basis point, respectively.
Note 3 to the financial statements provides further information.
Selling, General and Administrative (SG&A) expenses for 1996 were $1.4
billion or 16.2% of sales. SG&A in the two previous years was 15.9% and 15.4%
of sales. The 1996 increase of 30 basis points primarily resulted from full
achievement of annual bonus performance goals by management in 1996 compared
to partial achievement in 1995. Additionally, prior to fiscal 1996, costs
associated with relocating and closing stores that amounted to $13.8 and $19.7
million in 1995 and 1994, were charged against a restructuring reserve,
established in 1991; in 1996, similar costs were expensed and had a negative
13 basis point impact.
Store opening costs were $59.2 million for 1996. These costs were $49.6
and $40.7 million for 1995 and 1994, respectively. As a percentage of sales,
store opening costs were 0.7% for all 3 years presented. These costs
currently average about $900 thousand per store and are expensed as incurred.
Depreciation, reflecting continuing fixed asset expansion, increased 32%
to $198 million. There was a 37% and 36% increase for 1995 and 1994,
respectively. Depreciation as a percentage of sales was 2.3% for 1996, 2.1%
for 1995 and 1.8% for 1994. Approximately one-half of new stores opened in
the last three years were leased. Of these leased locations, approximately
93%, 60% and 57% in 1996, 1995 and 1994 were under capital leases.
Employee retirement plans for 1996 were $68.3 million or .8% to sales.
This cost is consistent with .7% for 1995 and .8% for 1994. See Note 10 to
the financial statements for further disclosure.
Interest costs as a percent of sales were .6% for 1996 and .5% for 1995
and 1994. Interest totaled $49 million in 1996, $38 million in 1995 and
$27.9 million for 1994. Interest costs as represented by capital leases
were $29.1, $16.9 and $7.4 million for 1996, 1995 and 1994, respectively. See
Note 6 to the financial statements for particulars on long-term indebtedness
and the discussion below on liquidity and capital resources.
Income tax rates were 35.6%, 35.8% and 34.9% in 1996, 1995 and 1994,
respectively. The lower rates in 1996 and 1994 were primarily due to
utilization of available state net operating losses.
Cash dividends paid to common shareholders were $34.7, $30.5 and $27.4
million in 1996, 1995 and 1994, respectively. The Company has paid cash
dividends each quarter since becoming a public company in 1961. At January
31, 1997 there were 11,460 shareholders of record. Please refer to the Stock
Performance Chart on page 38 for further details on dividends and stock
performance.
BALANCE SHEET MANAGEMENT
Effective inventory management stems from efficient logistics and
distribution of merchandise assortments based on sales plans and forecasts.
Inventory turnover (cost of sales divided by average inventory) is an often
used performance measurement. In 1996 and 1995, the Company's inventory
turned 4.3 times, compared to 4.7 turns in 1994. These turn rates were
accomplished while the Company increased its square footage in its
distribution centers from 1.9 million square feet at January 31, 1994 to 5.7
million square feet at January 31, 1997. In addition a new distribution
center, having approximately 785,000 square feet, received inventory prior to
year end in preparation for operation in early 1997.
Accounts receivable were $118 million at January 31, 1997 compared to $113
million at January 31, 1996 and $109 million at January 31, 1995. A program
was in effect through first quarter 1995 wherein the Company sold an undivided
fractional interest in a designated pool of receivables. At January 31, 1995,
the interest in receivables sold was $38.5 million. No receivables were sold
at January 31, 1996 or 1997. Note 2 to the financial statements provides
further information.
Property, less accumulated depreciation increased 34% to $2.49 billion at
January 31, 1997. At January 31, 1996 it increased 33% over January 31, 1995
levels. The majority of the increase stems from the Company's expansion
program, including land, building, store equipment, fixtures and displays and
investment in new state of the art distribution facilities.
Other assets primarily consist of land and buildings relating to vacated
stores which are available for sale or lease, investments in low income
housing, and notes receivable relating to sales of excess properties. The
vacated properties are carried at their estimated net realizable value. At
January 31, 1997, the carrying value was approximately $27 million compared
to $26 million one year ago and $42 million two years ago. Investments in low
income housing at January 31, 1997 and 1996 were $13 million and at January
31, 1995, were $11 million. Notes receivable relating to sales of excess
properties were $7.3 million at year-end, down $2.4 million from the previous
year.
Accounts payable, as a percentage of year-end inventory was 57% at January
31, 1997 compared to 52% at January 31, 1996 and 60% at January 31, 1995. The
proportions reflect the result of changes in inventory product mix, sales
velocity, and levels of purchases near year end.
Long-term debt, excluding current maturities, at January 31, 1997 was
$767.3 million, down 11% from January 31, 1996. This decrease resulted
primarily from the conversion of $284.7 million principal of the Company's 3%
Convertible Subordinated Notes offset by increased capital lease obligations
of $182.7 million related to the Company's expansion program. The previous
year had an increase of 27%.
Shareholders' equity continues to finance the biggest portion of assets.
Total shareholders' equity increased by $560.8 million in 1996 and financed
50% of assets at January 31, 1997. This compares to 46.6% at January 31, 1996
and 45.7% at January 31, 1995. (See Note 11 to the financial statements for
further details and related comments under "financing activities" below.)
FINANCIAL MANAGEMENT
Liquidity and Capital Resources
Primary sources of liquidity are cash flows from operating activities and
certain financing activities. Net cash provided by operating activities was
$543.0 million for 1996. This compared to $303.3 and $359.0 million for 1995
and 1994, respectively. Information on consolidated cash flows (operating,
financing, and investing activities) is set forth in the Statements of Cash
Flows on page 27.
Working capital at January 31, 1997, was $502.9 million. This compared to
$653.8 million at January 31, 1996 and $611.3 million at January 31, 1995.
Financing activities in 1996 included the conversion of $284.7 million
principal of 3% Convertible Subordinated Notes into common stock at a rate of
38.272 shares per each $1,000 principal and $17.7 million of scheduled debt
repayments. In 1995, the Company issued $100 million aggregate (net $99
million) principal 6.375% Senior Notes and had scheduled debt repayments of
$25.1 million. In 1994, the Company had $41.5 million of scheduled debt
repayments.
In 1994, the Company sold 10,350,000 shares of common stock. This
transaction realized $315.7 million, net of the underwriting discount and
other costs. The proceeds were used to finance the Company's expansion
program and for general corporate purposes. At January 31, 1997, an
uncommitted aggregate of $74 million was available under a $500 million shelf
registration filed with the Securities and Exchange Commission (SEC) in 1994.
During 1996, the Company filed with the SEC another shelf registration
statement covering an additional $275 million of "unallocated" debt or equity
securities. This leaves the Company with an uncommitted aggregate of $349
million available under shelf registrations filed with the SEC. These
registrations enable the Company to issue common stock, preferred stock,
senior unsecured debt securities, or subordinated unsecured debt securities.
During 1996, 1995 and 1994, the Company entered into various leases for
new store facilities. The majority of these leases were classified as capital
leases, the result of which is to increase long-term debt. Amounts classified
as capital leases (i.e. long-term debt) were $182.7, $96.9 and $104.2 million
for 1996, 1995 and 1994, respectively.
The Company has only limited involvement with derivative financial
instruments, and does not use them for trading purposes. The Company enters
into derivatives, exclusively interest rate swaps and caps, to lower funding
costs or alter interest rate exposures for long-term liabilities. At January
31, 1997, the Company had 5 interest rate swap agreements outstanding with
financial institutions, having notional amounts of $10 million each and a
total notional amount of $50 million and was a party to 5 interest rate cap
agreements, each with terms tied to the terms of the interest rate swap
agreements. These interest rate swap and cap agreements will expire in 1997.
Major uses of cash will continue to be investments in new store facilities.
In 1996, capital investment was $860 million (cash outlays of $677 million
plus capital leases of $183 million) which did not include operating leases of
approximately $119 million. The Company's 1997 capital budget is targeted at
$1.2 billion, inclusive of approximately $300 million of operating or capital
leases. More than 80% of this planned commitment is for store expansion.
Expansion plans for 1997 consist of approximately 60 to 65 new stores with
about 70% in new markets and the balance being relocations of existing stores
which will increase sales floor square footage by approximately 20%.
Approximately one-half of the 1997 projects will be leased and one-half will
be owned.
A new distribution center, having approximately 785,000 square feet, will
be operational in early 1997. At year end, the Company operated five
distribution centers and twelve smaller support facilities.
Present plans are to finance 1997's expansion program through funds from
operations, leases and from external financing. (See related comments under
"financing activities" above.)
Short-term capital needs will be financed through utilization of the
Company's bank credit agreements and commercial paper program. Formal bank
credit agreements in place are discussed in Note 5 to the financial statements.
The ratio of long-term debt to equity plus long-term debt was 25.7%, 34.3%
and 32.4% with fixed charge coverage at 6.3, 5.8 and 6.8 for 1996, 1995 and
1994, respectively. The decrease in long-term debt to equity plus long-term
debt in 1996 is primarily a result of the conversion of debt to equity
discussed above.
OTHER
General inflation has not had a material impact on the Company during the
past three years. As noted above, the LIFO charge decreased to $1.4 in 1996
from $8.3 million in 1995, compared to the 1994 charge of $435 thousand.
Overall inventory inflation was .15%, .79% and .07% for 1996, 1995 and 1994,
respectively. Lumber products have experienced substantially more volatility
than other merchandise categories, due to supply-demand variability, weather
constraints, environmental concerns, etc. The inflation (deflation) rates for
lumber and building materials were 3.6%, (3.2%) and (0.4%) for 1996, 1995 and
1994, respectively.
Page 24:
Disclosure Regarding Forward-Looking Statements
This Annual Report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical facts included in the
Annual Report, including certain statements in the "Shareholders' Letter,"
"Teamwork in Action" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
the Company's financial position and business strategy, may constitute
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
the Company's expectations (cautionary statements) are:
- - The Company's sales are dependent on the general economic health of the
country, variations in the number of new housing starts, the level of repairs,
remodeling and additions to existing homes, commercial building activity, and
the availability and cost of financing. An economic downturn can adversely
affect sales because much of the Company's inventory is purchased for
discretionary projects which can be deferred.
- - The Company's expansion strategy may be impacted by environmental
regulations, local zoning issues and delays, and more stringent land use
regulations than it has traditionally experienced.
- - Many of the Company's products are commodities whose price fluctuates
erratically within an economic cycle, a condition true of lumber and plywood.
- - The Company's business is highly competitive, and as it expands to larger
markets the Company may face new forms of competition which do not exist in
some of the markets it has traditionally served.
- - The ability of the Company to continue its everyday competitive pricing
strategy and provide the products that consumers desire depends on the vendor
community providing a reliable supply of inventory at competitive prices.
- - On a short-term basis, inclement weather may impact sales performance of
certain product groups such as lawn and garden, lumber, and building
materials.
Lowe's Leadership
Executive Officers and Management
Gregory M. Bridgeford - Senior Vice President and General Merchandise Manager
Richard D. Elledge - Senior Vice President, Chief Accounting Officer and
Assistant Secretary
Lee Herring - Senior Vice President, Logistics
William L. Irons - Senior Vice President, Management Information Services
W. Cliff Oxford - Senior Vice President, Corporate and Human Development
Dale C. Pond - Senior Vice President, Marketing
David E. Shelton - Senior Vice President, Real Estate/Engineering &
Construction
Larry D. Stone - Executive Vice President, Store Operations
Robert L. Strickland - Chairman of the Board
Robert L. Tillman - President & Chief Executive Officer
William C. Warden, Jr. - Executive Vice President, General Counsel, Chief
Administrative Officer and Secretary
Gregory J. Wessling - Senior Vice President and General Merchandise Manager
Thomas E. Whiddon - Executive Vice President and Chief Financial Officer
Corporate officers, Regional Staff and Departmental Management
Bruce Ballard - Vice President, The Contractor Yard, Inc.
Frank A. Beam - Regional Vice President
Kevin D. Bennett - Senior Corporate Counsel and Assistant Secretary
Kenneth W. Black, Jr. - Controller
Douglas L. Bowen - Regional Vice President
Nick Canter - Regional Vice President
Jeffrey E. Gray - Senior Corporate Counsel and Assistant Secretary
R. Vaughn Hayes - Vice President, Store Planning
Arnold N. Lakey - Vice President, Credit Management
Michael K. Menser - Vice President, Logistics
W. Nathan Mitchell - Assistant Secretary, Senior Director of Accounting
Kenneth A. Neal - Assistant Treasurer
James C. Neustadt - Vice President, Advertising
Robert A. Niblock - Vice President and Treasurer
Robert G. Oberosler - Vice President, Loss Prevention and Safety
William D. Pelon - Regional Vice President
K. Scott Plemmons - Vice President, Store Operations
Robert D. Skees - Vice President, Internal Audit
Don T. Stallings - Regional Vice President
John W Vining, Jr. - Vice President, Administration
William L. White - Regional Vice President
Karen R. Worley - Vice President, Managerial Accounting
Pages 25 - 36:
Consolidated Statements of Current and Retained Earnings
Lowe's Companies, Inc. and Subsidiary Companies
Dollars In Thousands, Except Per Share Data
Fiscal Years End on January 31 of Following Year
Fiscal % Fiscal % Fiscal %
1996 Sales 1995 Sales 1994 Sales
Current Earnings
Net Sales $8,600,241 100.0% $7,075,442 100.0% $6,110,521 100.0%
Cost of Sales 6,376,482 74.1 5,312,195 75.1 4,597,977 75.2
Gross Margin 2,223,759 25.9 1,763,247 24.9 1,512,544 24.8
Expenses:
Selling, General
and administrative 1,395,523 16.2 1,127,333 15.9 941,079 15.4
Store Opening Costs 59,159 0.7 49,626 0.7 40,727 0.7
Depreciation 198,115 2.3 150,011 2.1 109,647 1.8
Employee Retirement Plans (Note 10) 68,289 0.8 46,130 0.7 49,687 0.8
Interest (Notes 7 and 16) 49,067 0.6 38,040 0.5 27,873 0.5
Total Expenses 1,770,153 20.6 1,411,140 19.9 1,169,013 19.2
Pre-Tax Earnings 453,606 5.3 352,107 5.0 343,531 5.6
Income Tax Provision (Note 9) 161,456 1.9 126,080 1.8 119,971 1.9
Net Earnings $292,150 3.4% $226,027 3.2% $223,560 3.7%
Shares Outstanding-Weighted Average 167,678 160,453 154,926
Earnings Per Common & Common
Equivalent Share $1.74 $1.41 $1.44
Earnings Per Common Share -
Assuming Full Dilution $1.71 $1.36 $1.39
Per Per Per
Retained Earnings (Notes 6 and 11) Amount Share Amount Share Amount Share
Balance at beginning of year $988,447 $792,891 $596,764
Net Earnings 292,150 $1.74 226,027 $1.41 223,560 $1.44
Cash Dividends (34,709) ($0.21) (30,471) ($0.19) (27,433) ($0.18)
Balance at end of year $1,245,888 $988,447 $792,891
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
Lowe's Companies, Inc. and Subsidiary Companies
Dollars in thousands
January 31, % January 31, % January 31, %
1997 Total 1996 Total 1995 Total
Assets
Current Assets:
Cash and Cash Equivalents $40,387 0.9% $63,868 1.8% $150,319 4.8%
Short-Term Investments 30,103 0.7 107,429 3.0 118,155 3.8
Accounts Receivable -Net (Note 2) 117,562 2.7 113,483 3.2 109,214 3.5
Merchandise Inventory (Note 3) 1,605,880 36.2 1,267,077 35.6 1,132,282 36.5
Deferred Income Taxes (Note 9) 19,852 0.4 19,168 0.5 18,129 0.6
Other Current Assets 37,682 0.8 32,659 0.9 29,069 0.9
Total Current Assets 1,851,466 41.7 1,603,684 45.0 1,557,168 50.1
Property, Less Accumulated
Depreciation (Notes 4 and 6) 2,494,396 56.3 1,858,274 52.3 1,397,713 45.0
Long-Term Investments (Note 8) 35,615 0.8 41,059 1.2 83,459 2.7
Other Assets 53,477 1.2 53,369 1.5 67,652 2.2
Total Assets $4,434,954 100.0% $3,556,386 100.0% $3,105,992 100.0%
Liabilities and Shareholders' Equity
Current Liabilities:
Short-Term Notes Payable (Note 5) $80,905 1.8% $16,617 0.5% $1,903 0.1%
Current Maturities of Long-Term
Debt (Note 6) 22,566 0.5 14,127 0.4 26,913 0.9
Accounts Payable 914,167 20.6 655,399 18.4 675,436 21.7
Employee Retirement Plans (Note 10) 60,770 1.4 44,924 1.3 43,950 1.4
Accrued Salaries and Wages 71,662 1.6 67,370 1.9 63,356 2.0
Other Current Liabilities 198,461 4.5 151,494 4.2 134,334 4.4
Total Current Liabilities 1,348,531 30.4 949,931 26.7 945,892 30.5
Long-Term Debt, Excluding Current
Maturities (Note 6) 767,338 17.3 866,183 24.4 681,184 21.9
Deferred Income Taxes (Note 9) 101,609 2.3 83,557 2.3 49,211 1.6
Accrued Store Restructuring Costs
(Note 15) - - - - 9,815 0.3
Total Liabilities 2,217,478 50.0 1,899,671 53.4 1,686,102 54.3
Commitments, Contingencies and
Litigation (Notes 13 and 14)
Shareholders' Equity (Notes 11 and 12):
Preferred Stock - $5 Par Value,
none issued - - -
Common Stock - $.50 Par Value;
Fiscal Issued and Outstanding
1996 173,403,639
1995 160,918,046
1994 159,527,389 86,702 2.0 80,459 2.3 79,764 2.6
Capital in Excess of Par 903,661 20.3 596,828 16.7 554,838 17.9
Retained Earnings 1,245,888 28.1 988,447 27.8 792,891 25.5
Unearned Compensation-Restricted
Stock Awards (18,434) (0.4) (8,076) (0.2) (5,949) (0.2)
Unrealized Loss on Available
For Sale Securities (Note 11) (341) - (943) - (1,654) (0.1)
Total Shareholders' Equity 2,217,476 50.0 1,656,715 46.6 1,419,890 45.7
Total Liabilities and
Shareholders' Equity $4,434,954 100.0% $3,556,386 100.0% $3,105,992 100.0%
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Lowe's Companies, Inc. and Subsidiary Companies
Dollars in Thousands
Fiscal Years End on January 31 of Following Year
Fiscal Fiscal Fiscal
1996 1995 1994
Cash Flows From Operating Activities:
Net Earnings $292,150 $226,027 $223,560
Adjustments to Reconcile Net Earnings to Net
Cash Provided By Operating Activities:
Depreciation 198,115 150,011 109,647
Amortization of Original Issue Discount 1,671 3,601 3,205
Increase in Deferred Income Taxes 17,043 32,924 18,108
(Gain) Loss on Disposition/Writedown of
Fixed and Other Assets 9,892 (1,171) 5,924
Decrease (Increase) in Operating Assets:
Accounts Receivable - Net (4,079) (4,269) (60,714)
Merchandise Inventory (338,803) (134,795) (278,575)
Other Operating Assets (4,788) (3,298) 31,170
Increase (Decrease) in Operating Liabilities:
Accounts Payable 258,768 (20,037) 208,158
Employee Retirement Plans 59,736 38,196 41,257
Accrued Store Restructuring (8,304) (10,000)
Other Operating Liabilities 53,288 24,424 67,236
Net Cash Provided by Operating Activities 542,993 303,309 358,976
Cash Flows from Investing Activities:
Decrease (Increase) in Investment Assets:
Short-Term Investments 98,754 18,538 (83,374)
Purchases of Long-Term Investments (27,259) (30,906) (74,614)
Proceeds from Sale/Maturity of Long-Term
Investments 12,203 66,588 29,452
Other Long-Term Assets 3,456 (2,656) (2,438)
Fixed Assets Acquired (677,160) (520,362) (414,103)
Proceeds from the Sale of Fixed and
Other Long-Term Assets 11,615 20,856 15,179
Net Cash Used in Investing Activities (578,391) (447,942) (529,898)
Cash Flows from Financing Activities:
Sources:
Long-Term Debt Borrowings - 98,959 500
Net Increase in Short-Term Borrowings 64,288 14,714 -
Proceeds from Issuance of Common Stock - - 315,697
Stock Options Exercised - 44 1,100
Total Financing Sources 64,288 113,717 317,297
Uses:
Repayment of Long-term Debt (17,662) (25,064) (41,498)
Net Decrease in Short-Term Borrowings (378)
Cash Dividend Payments (34,709) (30,471) (27,433)
Total Financing Uses (52,371) (55,535) (69,309)
Net Cash Provided by Financing Activities 11,917 58,182 247,988
Net Increase (Decrease) in Cash and Cash Equivalents (23,481) (86,451) 77,066
Cash and Cash Equivalents, Beginning of Year 63,868 150,319 73,253
Cash and Cash Equivalents, End of Year $40,387 $63,868 $150,319
See accompanying notes to consolidated financial statements.
</TABLE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOWE'S COMPANIES, INC. AND SUBSIDIARY COMPANIES
FISCAL YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 1 - Summary of Significant Accounting Policies:
The Company is one of America's largest retailers serving the do-it-yourself
home improvement, home decor, and home construction markets. The Company
serves customers in 402 stores in 24 states predominantly located in the
eastern half of the United States. Below are those accounting policies
considered to be significant.
Subsidiaries and Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly owned. All material intercompany accounts and transactions
have been eliminated.
Use of Estimates - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,
demand deposits, and short-term investments with original maturities of three
months or less when purchased.
Investments - The Company has a cash management program which provides for the
investment of excess cash balances in financial instruments which have
maturities of up to three years. Investments, exclusive of cash equivalents,
with a maturity of one year or less from the balance sheet date are classified
as short-term investments. Investments with maturities greater than one year
are classified as long-term. Investments consist primarily of tax exempt notes
and bonds, auction rate tax exempt securities, municipal preferred tax exempt
stock and repurchase agreements.
The Company has classified all investment securities as available-for-sale and
they are carried at fair value. Unrealized gains and losses on such securities
are excluded from earnings and reported as a separate component of
shareholders' equity, net of the related income taxes, until realized.
Derivatives - The Company does not use derivative financial instruments for
trading purposes. Interest rate swap agreements, which are principally used
by the Company in the management of interest rate exposure, are accounted for
on an accrual basis. Income and expense are recorded in the same category as
that arising from the related liability. Amounts to be paid or received under
interest rate swap agreements are recognized as interest income or expense in
the periods in which they accrue.
Premiums paid for purchased interest rate cap agreements are being amortized
to interest expense over the terms of the caps. Unamortized premiums are
included in other assets in the consolidated balance sheet. Amounts to be
received under the cap agreements are accounted for on an accrual basis, and
are recognized as a reduction of interest expense.
Accounts Receivable - The majority of the accounts receivable arise from sales
to professional building contractors predominantly located in the eastern half
of the United States. The allowance for doubtful accounts is based on
historical experience and a review of existing receivables.
Sales generated through the Company's private label credit cards are not
reflected in receivables. These credit card receivables are sold, with
limited recourse, to an outside finance company.
Merchandise Inventory - Inventory is stated at the lower of cost or market. In
an effort to more closely match cost of sales and related sales, cost is
determined using the last-in, first-out (LIFO) method. Included in inventory
cost are administrative, warehousing and other costs directly associated with
buying, distributing and maintaining inventory in a condition for resale.
Property and Depreciation - Property is recorded at cost. Costs associated
with major additions are capitalized and depreciated. Upon disposal, the cost
of properties and related accumulated depreciation is removed from the
accounts with gains and losses reflected in earnings.
Depreciation is provided over the estimated useful lives of the depreciable
assets. Assets are generally depreciated on the straight-line method.
Leasehold improvements are depreciated over the shorter of their estimated
useful lives or term of the related lease.
Leases - Assets under capital leases are amortized in accordance with the
Company's normal depreciation policy for owned assets or over the lease term
if shorter. The charge to earnings resulting from amortization of these assets
is included in depreciation expense in the consolidated financial statements.
Income Taxes - Income taxes are provided for temporary differences between the
tax and financial accounting bases of assets and liabilities using the
liability method. The tax effects of such differences are reflected in the
balance sheet at the enacted tax rates expected to be in effect when the
differences reverse.
Store Pre-opening Costs - Costs of opening new retail stores are charged to
operations as incurred.
Store Closing Costs - In fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," (SFAS 121). SFAS
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets. Under
provisions of the Statement, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. At the time
management commits to close or relocate a store location, the Company
evaluates the carrying value of the assets in relation to its expected future
cash flows. If the carrying value of the assets is greater than the expected
future cash flows, a provision is provided for the impairment of the assets.
Prior to adoption of SFAS 121, the Company charged to expense, upon the
closing or relocation of a store, costs considered to be unrecoverable, such
as the book value of certain fixtures and equipment and the estimated loss on
sale of land and buildings. There was no material effect on the financial
statements resulting from the adoption of SFAS 121.
When a leased location closes, a provision is provided for the present value
of future lease obligations, net of sublease income.
The estimated realizable value of closed store real estate owned is included
in other assets. See note 15 regarding the store restructuring accrual in
fiscal 1991.
Advertising - Costs associated with advertising are charged to operations as
incurred. Advertising expenses were $99.8, $87.8 and $71.0 million for Fiscal
1996, 1995 and 1994, respectively.
Earnings Per Share - Earnings per share are calculated on the weighted average
shares of common stock and dilutive common stock equivalents outstanding each
year. The Company's 3% Convertible Subordinated Notes, which were called July
22, 1996, were potentially dilutive securities for purposes of calculating
fully diluted earnings per share.
NOTE 2 - Accounts Receivable
Until termination in April 1995, the Company had an agreement to sell, with
limited recourse, an undivided fractional interest in a designated pool of
receivables. Under the agreement, as collections reduced previously sold
interests in receivables, an interest in new receivables could be sold. At
January 31, 1995, the interest in receivables sold totaled $38.5 million. Due
to hold-back provisions of the agreement, the Company was due $8.5 million at
January 31, 1995 for interests sold. These receivables were included in
Accounts Receivable - Net in the consolidated balance sheet. The costs
associated with selling the interest in receivables were $.5 and $1.7 million
for Fiscal 1995 and 1994, respectively. The Company maintained an allowance
for doubtful accounts because it retained substantially the same risk of
credit loss as if the receivables had not been sold.
The allowance for doubtful accounts was $2.3, $1.9 and $2.3 million at January
31, 1997, 1996 and 1995, respectively.
NOTE 3 - Merchandise Inventory:
If the FIFO method had been used, inventories would have been $74.6, $73.2 and
$65.0 million higher at January 31, 1997, 1996 and 1995, respectively.
NOTE 4 - Property and Accumulated Depreciation:
Net property includes $421.9, $248.9 and $159.0 million in assets from capital
leases at January 31,1997, 1996 and 1995, respectively.
Property is summarized below by major class:
January 31
1997 1996 1995
(Dollars in Thousands)
Cost:
Land $484,100 $355,701 $290,312
Buildings 1,324,323 939,120 686,737
Store, Distribution and Office Equipment 1,175,411 913,225 666,885
Leasehold Improvements 120,269 109,850 98,217
Total Cost 3,104,103 2,317,896 1,742,151
Accumulated Depreciation and Amortization (609,707) (459,622) (344,438)
Net Property (Note 13) $2,494,396 $1,858,274 $1,397,713
The estimated depreciable lives, in years, of the Company's property are:
buildings, 20 to 40; store and office equipment, 3 to 10; leasehold
improvements, generally the life of the related lease.
NOTE 5 - Short-Term Borrowings and Lines of Credit:
The Company has a $300 million revolving credit facility with a syndicate of
13 banks. The facility has $200 million expiring November 27, 2001, with the
remaining $100 million expiring November 26, 1997. The facility is used to
support the Company's commercial paper program and for short-term borrowings.
Facility fees ranging from .06% to .075% are paid on the unused amount of
these facilities. At January 31, 1997, there were no borrowings outstanding
under this revolving credit facility.
Several banks have extended lines of credit aggregating $200.7 million for the
purpose of issuing documentary letters of credit and standby letters of
credit. These lines do not have termination dates but are reviewed
periodically. Commitment fees from .12% to .50% per annum are paid on the
amounts of standby letters of credit used. At January 31, 1997, outstanding
letters of credit aggregated $86.1 million.
A $60 million revolving credit and security agreement, expiring in September
1997 and renewable annually, is available from a financial institution. At
January 31, 1997, there was $59.9 million outstanding under this credit and
security agreement and $67.1 million of the Company's accounts receivable were
pledged as collateral.
In addition, $55 million is available, on an unsecured basis, for the purpose
of short-term borrowings on a bid basis from various banks. These lines are
uncommitted and are reviewed periodically by both the banks and the Company.
At January 31, 1997, there were no borrowings outstanding under these lines of
credit.
NOTE 6 - Long-Term Debt:
Fiscal Year
Debt of Final January 31
Category Interest Rates Maturity 1997 1996 1995
(Dollars in Thousands)
Secured Debt1:
Industrial Revenue Bonds 3.55% to 6.27% * 2020 $5,497 $6,726 $7,997
Industrial Revenue Bonds 2 3.70% * 2005 5,400 8,000 8,800
Insurance Company Notes 6.75% 1998 161 286 414
Other Notes 9.50% 2005 388 470 561
Unsecured Debt:
Medium Term Notes 6.50% to 8.20% 2022 249,985 249,979 249,972
Convertible Subordinated Notes 3 255,554 254,505
Senior Notes4 6.38% 2005 99,072 98,968
Bank Notes 6,000 23,863
Capital Leases (Note 13) 6.12% to 13.17% 2033 429,401 254,327 161,985
Total Long-Term Debt 789,904 880,310 708,097
Less Current Maturities 22,566 14,127 26,913
Long-Term Debt, Excluding
Current Maturities $767,338 $866,183 $681,184
* Interest rate varies as a percentage of prime rate or other interest index.
Interest rates shown are as of January 31, 1997.
Prime rate was 8.25% at January 31, 1997.
Debt maturities, exclusive of capital leases (see Note 13), for the next five
fiscal years are as follows (in millions): 1997, $13.0; 1998, $1.5; 1999,
$46.4; 2000, $74.2; 2001, $15.7.
Notes:
1 Real properties pledged as collateral for secured debt had net book values
(in millions) at January 31, 1997, as follows: industrial revenue bonds -
$19.4; insurance company notes - $3.4; other notes - $2.1.
2 With certain restrictions, the floating rate demand industrial revenue
bonds can be converted to a fixed interest rate based on a fixed interest
index at the Company's option.
3 The Company's 3% Convertible Subordinated Notes with a conversion rate of
38.272 shares of common stock per each $1,000 principal amount were called
for redemption on July 22, 1996. During Fiscal 1996 (prior to the
redemption date), 1995 and 1994, $284,724,000, $2,532,000 and $224,000 in
principal of the Company's 3% Convertible Subordinated Notes were converted
into 10,896,910, 96,904 and 8,570 shares of the Company's common stock,
respectively. In addition, $20,000 in principal was redeemed at $910.78
per $1,000 during Fiscal 1996.
4 On December 15, 1995, the Company issued $100 million of 6.375% Senior
Notes due December 15, 2005. The notes were issued at an original price of
$989.55 per $1,000 principal amount, which represented an original issue
discount of .395% payable at maturity and an underwriters' discount of
.65%. Annual interest on the notes at 6.375% and accretion of the original
issue discount represents an annual yield to maturity of 6.429%. The notes
may not be redeemed prior to maturity.
NOTE 7 - Derivative Financial Instruments:
Interest rate swaps allow the Company to raise long-term borrowings at fixed
rates and swap them into variable rates for shorter durations. At January 31,
1997, the Company had 5 interest rate swap agreements outstanding with
financial institutions, having notional amounts of $10 million each and a
total notional amount of $50 million. Under the agreements, the Company will
receive interest payments at an average fixed rate of 6.20% and will pay
interest on the same notional amounts at a floating rate based on an interest
rate index, which was 5.69% as of January 31, 1997. These interest rate swap
agreements are scheduled to expire in 1997.
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on the interest rate swap agreements discussed
above. At January 31, 1997, the Company was a party to 5 interest rate cap
agreements, each with terms tied to the terms of the interest rate swap
agreements. The agreements entitle the Company to receive from counterparties
on a semi-annual basis the amounts, if any, by which the Company's interest
payments on its $50 million notional amount of interest rate swap agreements
exceed approximately 75 basis points over the fixed rate on each swap.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to its interest rate swap and cap agreements. The Company
anticipates that counterparties will be able to fully satisfy their
obligations under the agreements. The counterparties consist of a number of
financial institutions whose credit ratings were AA or better at the time the
agreements were instituted. No collateral is held in relation to the
agreements.
NOTE 8 - Disclosures about Fair Values of Financial Instruments:
The following are financial instruments whose estimated fair value amounts are
different from their carrying amounts. Estimated fair values have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
(Dollars in Thousands) January 31, 1997 January 31, 1996 January 31, 1995
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
Liabilities:
Long-Term Debt:
Convertible
Subordinated Notes $255,554 $348,455 $254,505 $402,186
Other 789,904 $818,508 624,756 670,313 453,592 456,914
Off-Balance Sheet Financial Instruments-
Unrealized Gains (Losses)
Interest Rate Swap
Agreements 84 758 (6,482)
Interest Rate Cap
Agreements 9 3,915
Long-term debt - Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues that are not quoted on an exchange.
Interest rate swap agreements and interest rate cap agreements - The fair
value of interest rate swaps and caps are the amounts at which they could be
settled, based on estimates obtained from dealers.
The amortized cost, gross unrealized gains and losses and fair values of
investment securities, all of which are classified as available-for-sale
securities, at January 31, 1997, 1996 and 1995 are as follows:
(Dollars in Thousands)
Amortized Gross Unrealized Fair
Type Cost Gains Losses Value
Municipal Obligations $19,514 $ 1 $19,515
Adjustable Rate Preferred Stock 11,010 $(422) 10,588
Classified as Short-term 30,524 1 (422) 30,103
Municipal Obligations -
Classified as Long-term 35,718 139 (242) 35,615
Total at January 31, 1997 $66,242 $140 $(664) $65,718
Municipal Obligations $ 29,298 $ 6 $ (1) $29,303
Auction Rate and Adjustable
Rate Preferred Stock 79,879 (1,761) 78,126
Classified as Short-term 109,177 14 (1,762) 107,429
Municipal Obligations 39,762 332 (35) 40,059
Auction Rate Preferred Stock 1,000 1,000
Classified as Long-term 40,762 332 (35) 41,059
Total at January 31, 1996 $149,939 $346 $(1,797) $148,488
Municipal Obligations $ 33,234 $ 1 $( 228) $ 33,007
Auction Rate and Adjustable
Rate Preferred Stock 86,476 13 (1,341) 85,148
Classified as Short-term 119,710 14 (1,569) 118,155
Municipal Obligations 50,944 989 (1,902) 50,031
Auction Rate Preferred Stock 33,500 ( 72) 33,428
Classified as Long-term 84,444 989 (1,974) 83,459
Total at January 31, 1995 $204,154 $1,003 $(3,543) $201,614
The proceeds from sales of available-for-sale securities were $15.1, $60.4 and
$79.9 million for Fiscal 1996, 1995 and 1994, respectively.
Gross realized gains and (losses) on the sale of available-for-sale securities
were $80 thousand and $(535) thousand for Fiscal 1996, $326 thousand and
$(426) thousand for Fiscal 1995 and $112 thousand and $(836) thousand for
Fiscal 1994.
Maturities of municipal obligations classified as long-term are $33.6 million
after 1 year through 5 years, $0 after 5 years through 10 years and $2.1
million after 10 years.
NOTE 9 - Income Taxes:
(Dollars in Thousands)
Fiscal Years End on
January 31 1996 1995 1994
of Following Year Amount % Amount % Amount %
Statutory Rate Reconciliation
Pre-Tax Earnings $453,606 100.0% $352,107 100.0% $343,531 100.0%
Federal Income Tax at
Statutory Rate 158,762 35.0 123,237 35.0 120,236 35.0
State Income Taxes-Net
of Federal Tax Benefit 7,968 1.8 8,093 2.3 4,248 1.2
Other (5,274) (1.2) (5,250) (1.5) (4,513) (1.3)
Total Income Tax
Provision $161,456 35.6% $126,080 35.8% $119,971 34.9%
Components of Income Tax Provision
Current
Federal $135,075 83.7% $86,347 68.5% $ 98,432 82.0%
State 9,338 5.8 6,809 5.4 3,431 2.9
Total Current 144,413 89.5 93,156 73.9 101,863 84.9
Deferred
Federal 14,122 8.7 27,282 21.6 15,004 12.5
State 2,921 1.8 5,642 4.5 3,104 2.6
Total Deferred 17,043 10.5 32,924 26.1 18,108 15.1
Total Income Tax
Provision $161,456 100.0% $126,080 100.0% $119,971 100.0%
The tax effect of cumulative temporary differences and carryforwards that gave
rise to the deferred tax assets and liabilities and the related valuation
allowance at January 31, 1997, 1996 and 1995 is as follows (in thousands):
January 31, 1997 January 31, 1996 January 31, 1995
Assets Liabilities Total Assets Liabilities Total Assets Liabilities Total
Accrued Excess
Property and Store
Closing Costs $13,966 - $13,966 $6,245 - $6,245 $17,077 - $17,077
Insurance 9,470 - 9,470 6,725 - 6,725 4,568 - 4,568
Depreciation - $(117,779) (117,779) - $(92,280) (92,280) - $(67,461) (67,461)
Property Taxes 5,371 - 5,371 4,859 - 4,859 6,230 - 6,230
Other, Net 17,081 (9,555) 7,526 17,156 (5,529) 11,627 14,265 (5,612) 8,653
Less Valuation
Allowance (311) - (311) (1,565) - (1,565) (149) - (149)
Total $45,577 $(127,334) $(81,757) $33,420 $(97,809) $(64,389) $41,991 $(73,073) $(31,082)
The valuation allowance decreased $1,254,000, increased $1,416,000 and
decreased $3,577,000 for Fiscal 1996, 1995 and 1994, respectively.
NOTE 10 - Employee Retirement Plans:
The Company's contribution to its Employee Stock Ownership Plan (ESOP) is
determined annually by the Board of Directors. The ESOP covers all employees
after completion of one year of employment and 1,000 hours of service during
that year. Contributions are allocated to participants based on their eligible
compensation relative to total eligible compensation. The Board authorized
contributions totaling 14% of eligible compensation for Fiscal 1996 and 1995
and 13% of eligible compensation for Fiscal 1994. Contributions may be made in
cash or shares of the Company's common stock and are generally made in the
following fiscal year. ESOP expense for Fiscal 1996, 1995 and 1994 was $61.1,
$40.1 and $44.8 million, respectively.
At January 31, 1997, the Employee Stock Ownership Trust held approximately
12.8% of the outstanding common stock of the Company and was its second
largest shareholder.
Shares allocated to ESOP participants' accounts are voted by the trustee
according to the participants' voting instructions. Unallocated shares and
shares for which no voting instructions are received are voted by the trustee
as directed by a management committee. At January 31, 1997, there were no
unallocated shares.
The Board of Directors determines contributions to the Company's Employee
Savings and Investment Plan (ESIP) each year based upon a matching formula
applied to employee contributions. All employees are eligible to participate
in the ESIP on the first day of the month following completion of one year of
employment. Company contributions to the ESIP for Fiscal 1996, 1995 and 1994
were $7.2, $6.0 and $4.9 million, respectively. The Company's common stock is
an investment option for participants in the ESIP. At January 31, 1997, the
ESIP held approximately .9% of the outstanding common stock of the Company.
Shares held in the ESIP are voted by the trustee as directed by an
administrative committee of the ESIP.
The Company does not believe that it has any material liability for
postemployment or postretirement benefits.
NOTE 11 - Shareholders' Equity:
Authorized shares of common stock were 700 million at January 31, 1997, 1996
and 1995.
Transactions affecting the shareholders' equity section of the consolidated
balance sheets are summarized as follows:
(In Thousands) Shares (In Thousands) Shareholders' Equity
Unrealized
Unearned Loss on
Capital in Compensation Available
Common Excess of Retained Restricted For Sale Total
Outstanding Stock Par Value Earnings Stock Awards Securities Equity
Balance January 31, 1994 147,887 $73,943 $202,962 $596,764 $873,669
Net Earnings 223,560 223,560
Tax Effect of Non-qualified
Stock Options Exercised (Note 12) 2,344 2,344
Cash Dividends (27,433) (27,433)
Stock Sale 10,350 5,175 310,522 315,697
Stock Options Exercised
(Note 12) 172 86 1,219 1,305
Stock Received for Exercise of
Stock Options (6) (3) (202) (205)
Stock Issued to ESOP (Note 10) 922 461 31,268 31,729
Conversion of 3% Notes 8 4 193 197
Shares issued to Directors 4 2 124 126
Unearned Compensation-Restricted
Stock Awards (Note 12) 190 96 6,408 $(5,949) 555
Unrealized Loss on Available for Sale
Securities, Net of Income
Taxes of $886 $(1,654) (1,654)
Balance January 31, 1995 159,527 79,764 554,838 792,891 (5,949) (1,654) 1,419,890
Net Earnings 226,027 226,027
Tax Effect of Non-qualified
Stock Options Exercised (Note 12) 25 25
Cash Dividends (30,471) (30,471)
Stock Options Exercised (Note 12) 4 2 42 44
Stock Issued to ESOP (Note 10) 1,182 591 36,631 37,222
Conversion of 3% Notes 97 49 2,183 2,232
Shares issued to Directors 4 2 93 95
Unearned Compensation-Restricted
Stock Awards (Note 12) 104 51 3,016 (2,127) 940
Unrealized Loss on Available for Sale
Securities, Net of Income Tax
Benefit of $378 711 711
Balance January 31, 1996 160,918 80,459 596,828 988,447 (8,076) (943) 1,656,715
Net Earnings 292,150 292,150
Cash Dividends (34,709) (34,709)
Stock Issued to ESOP (Note 10) 1,215 607 43,283 43,890
Conversion of 3% Notes 10,897 5,448 251,350 256,798
Shares issued to Directors 4 2 135 137
Unearned Compensation-Restricted
Stock Awards (Note 12) 370 186 12,065 (10,358) 1,893
Unrealized Loss on Available for Sale
Securities, Net of Income Tax
Benefit of $325 602 602
Balance January 31, 1997 173,404 $86,702 $903,661 $1,245,888 $(18,434) $(341) $2,217,476
The Company has 5 million authorized shares of preferred stock ($5 par), none
of which have been issued. The preferred stock may be issued by the Board of
Directors (without action by shareholders) in one or more series, having such
voting rights, dividend and liquidation preferences and such conversion and
other rights as may be designated by the Board of Directors at the time of
issuance of the preferred shares.
The Company has a shareholder rights plan which provides for a dividend
distribution of one preferred share purchase right on each outstanding share
of common stock. Each purchase right will entitle shareholders to buy one
unit of a newly authorized series of preferred stock. A shareholder's
interest is not diluted by the effects of a stock dividend or stock split. At
the time of adopting the rights plan, each unit was intended to be the
equivalent of one share of common stock. The purchase rights will be
exercisable only if a person or group acquires or announces a tender offer for
20% or more of Lowe's common stock. The purchase rights do not apply to the
person or group acquiring the stock. The purchase rights will expire on
September 19, 1998.
NOTE 12 - Stock Incentive Plans:
The Company has two stock incentive plans, referred to as the "1994" and
"1997" Incentive Plans, under which incentive and non-qualified stock options,
stock appreciation rights, restricted stock awards and incentive awards may be
granted to key employees. The 1997 plan has been approved by the Board of
Directors and is subject to shareholder approval at the Annual Meeting in May
1997. No awards may be granted after January 31, 2004 under the 1994 plan
and 2007 under the 1997 plan. Stock options generally have terms ranging from
5 to 10 years, vest evenly over 3 years and are assigned an exercise price of
not less than the fair market value on the date of grant. At January 31,
1997, there were 576,990 and 4,910,000 (subject to shareholder approval)
shares available for grants under the 1994 and 1997 plans, respectively.
Option information is summarized as follows:
Key Employee Stock Option Plans Weighted-average
Shares Exercise Price Per Share
(in Thousands)
Outstanding January 31, 1994 154 $7.117
Granted 20 $38.750
Canceled or Expired (2) $6.375
Exercised (152) $7.128
Outstanding January 31, 1995 and 1996 20 $38.750
Canceled or Expired (10) $38.750
Granted 1,215 $39.125
Outstanding January 31, 1997 1,225 $39.122
Exercisable January 31, 1997,
expiring 2004 10 $38.750
Of the 1,225,000 options outstanding at January 31, 1997, the exercise prices
per share range from $38.75 to $39.125 and their weighted-average remaining
term is 4.8 years.
Stock appreciation rights are denominated in units, which are comparable to a
share of common stock for purposes of determining the amount payable under an
award. An award entitles the participant to receive the excess of the final
value of the unit over the fair market value of a share of common stock on the
first day of the performance period. The final value is the average closing
price of a share of common stock during the last month of the performance
period. Limits are established with respect to the amount payable on each
unit. A total of 758,950 stock appreciation rights, with performance periods
of three years and a maximum payout of $4,782,000, were outstanding at January
31, 1997. The costs of these rights are being expensed over the performance
periods and have reduced pre-tax earnings by $1.0, $1.0 and $2.1 million in
Fiscal 1996, 1995 and 1994, respectively.
Restricted stock awards of 388,550, 133,500 and 192,000, with per share
weighted-average fair values of $33.139, $31.251 and $34.202, were granted to
certain executives in Fiscal 1996, 1995 and 1994, respectively. These shares
are nontransferable and subject to forfeiture for periods prescribed by the
Company. These shares may become transferable and vested earlier based on
achievement of certain performance measures. During Fiscal 1996, a total of
18,250 shares were forfeited and 35,000 shares became vested and transferable.
At January 31, 1997, grants totaling 664,300 shares are included in
Shareholder's Equity and are being amortized as earned over periods not
exceeding seven years. Related amortization expense for Fiscal 1996, 1995 and
1994 was $1.9, $.6 and $.4 million, respectively.
The Company had a Non-Employee Directors' Stock Option Plan that expired at
the end of Fiscal 1993. This Plan provided stock options to each outside
Director following the Annual Meetings of 1989 through 1993. Options
representing 140,000 shares were granted under this Plan of which options
representing 56,000 shares have been exercised. The option price per share was
$6.375 for Fiscal 1989, $10.906 for Fiscal 1990, $8.625 for Fiscal 1991,
$10.969 for Fiscal 1992 and $18.875 for Fiscal 1993. At January 31, 1997,
options for 84,000 shares (expiration dates range from 1999 through 2003) were
exercisable under the Non-Employee Directors' Stock Option Plan.
The Company has a Director's Stock Incentive Plan. This Plan provides that at
the first Board meeting following each annual meeting of shareholders, the
Company shall issue each non-employee Director 500 shares of common stock. Up
to 25,000 shares may be issued under this Plan. In Fiscal 1996, 1995 and 1994,
4,000, 3,500 and 4,000 shares, respectively, were issued at under this Plan.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock options
plans. Accordingly, no compensation expense has been recognized for stock-
based compensation where the option price of the stock approximated the fair
market value of the stock on the date of grant, other than for restricted
stock grants and stock appreciation rights. No stock options were granted in
fiscal 1995. Had compensation for Fiscal 1996 stock options granted been
determined consistent with Statement of Financial Accounting Standards No.123
(SFAS 123), "Accounting for Stock-Based Compensation," the Company's net
earnings and earnings per common share amounts for Fiscal 1996 would
approximate the following proforma amounts (dollars in thousands except per
share data):
As Reported Proforma
Net Earnings $292,150 $291,411
Earnings per Common & Common Equivalent Share $ 1.74 $ 1.74
Earnings per Common Share - Assuming Full Dilution $ 1.71 $ 1.71
The fair value of each option granted during Fiscal 1996 is estimated as
$16.99 on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: expected volatility of 38%, expected dividend
yield of .2%; risk-free interest rate of 6%; and an expected life of 5 years.
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts.
NOTE 13 - Leases:
The Company leases certain store facilities under agreements with original
terms generally of twenty years. Agreements generally provide for contingent
rental based on sales performance in excess of specified minimums. To date,
contingent rentals have been very nominal. The leases typically contain
provisions for four renewal options of five years each. Certain equipment is
also leased by the Company under agreements ranging from two to five years.
These agreements typically contain renewal options providing for a
renegotiation of the lease, at the Company's option, based on the fair market
value at that time.
The future minimum rental payments required under capital and operating leases
having initial or remaining noncancelable lease terms in excess of one year
are summarized as follows:
Operating Leases Capital Leases
Fiscal Year Real Estate Equipment Real Estate Equipment Total
(Dollars in Thousands)
1997 $56,366 $497 $ 46,908 $197 103,968
1998 56,364 325 46,790 193 103,672
1999 50,648 278 46,780 193 97,899
2000 49,595 56 46,798 120 96,569
2001 49,338 - 46,817 - 96,155
Later Years 645,237 - 649,896 - 1,295,133
Total Minimum Lease
Payments $907,548* $1,156 $883,989 $703 $1,793,396
Total Minimum Capital Lease Payments $884,692
Less Amount Representing Interest 455,291
Present Value of Minimum Lease Payments 429,401
Less Current Maturities 9,546
Present Value of Minimum
Lease Payments,Less Current Maturities $419,855
* Total minimum payments have not been reduced by minimum sublease rentals
of $9.8 million to be received in the future under noncancelable
subleases.
Rental expenses under operating leases for real estate and equipment were
$59.2 million, $54.1 million and $40.2 million in Fiscal 1996, 1995 and 1994,
respectively.
NOTE 14 - Commitments, Contingencies and Litigation:
The Company had purchase commitments at January 31, 1997, of approximately
$43.5 million for land, buildings and construction of facilities, and $16.6
million for supplies and equipment.
The Company is a defendant in legal proceedings considered to be in the normal
course of business and none of which, singularly or collectively, are
considered material to the Company as a whole. Potential liability in excess
of the Company's self-insured retention under these proceedings is covered by
insurance.
The Company is subject to various environmental protection laws and
regulations and is operating within such laws or is taking action aimed at
assuring compliance with such laws and regulations. The Company has been
identified as a potentially responsible party in connection with two landfill
sites at which environmental damage is alleged. Management believes that it
is a very remote possibility that any associated costs to the Company will
have a material impact on the Company's financial condition or results of
operations.
NOTE 15 - Store Restructuring:
In Fiscal 1991, the Company recorded a pre-tax fourth quarter charge of $71.3
million for the expected costs and expenses required to accelerate the
Company's conversion from a chain of small stores to a chain of large stores.
The charge included stores closed and relocated under the restructuring plan
in the fourth quarter of Fiscal 1991 through Fiscal 1995. All costs
associated with relocations and closings during 1994 and 1995 were charged
against the restructuring accrual and did not have an effect on earnings. All
such costs in Fiscal 1996 were included in selling, general and administrative
expenses since the store restructuring accrual was depleted as of January 31,
1996.
NOTE 16 - Other Information:
(Dollars in Thousands)
Net interest expense is composed of the following:
Fiscal Years End on January 31 of Following Year 1996 1995 1994
Long-Term Debt $31,300 $34,536 $36,001
Capitalized Leases 29,076 16,872 7,436
Short-Term Debt 4,368 3,001 1,056
Amortization of Loan Costs 403 296 295
Short-Term Interest Income (8,765) (10,897) (12,237)
Interest Capitalized (7,315) (5,768) (4,678)
Net Interest Expense $49,067 $38,040 $27,873
Supplemental Disclosures of Cash Flow Information:
Fiscal Years End on January 31 of Following Year 1996 1995 1994
Cash Paid for Interest
(Net of Amount Capitalized) $66,350 $55,231 $43,145
Cash Paid for Income Taxes $125,266 $77,858 $108,064
Noncash Investing and Financing Activities:
Fixed Assets Acquired under
Capital Leases $182,676 $96,948 $104,207
Common Stock Issued to ESOP (Note 10 and 11) 43,890 37,222 31,729
Common Stock Issued to Executives and
Directors, net of Unearned Compensation 2,030 1,035 681
Common Stock Received for
Exercise of Stock Options - - 205
Conversion of Debt to Common Stock 256,798 2,232 197
Notes Received in Exchange
for Property $ - $1,450 $6,067
Page 37:
SELECTED FINANCIAL DATA
LOWE'S COMPANIES, INC. AND SUBSIDIARY COMPANIES
(Dollars in Thousands, Except Per Share Data)
Fiscal Years End on January 31 of
Following Year (Unaudited) 1996 1995 1994 1993 1992
Selected Income Statement Data:
Net Sales $8,600,241 $7,075,442 $6,110,521 $4,538,001 $3,846,418
Net Earnings 292,150 226,027 223,560 131,786 84,720
Earnings Per Share-Full Dilution 1.71 1.36 1.39 .89 .58
Cash Dividends Per Share $ .21 $ .19 $ .18 $ .16 $ .14
Selected Balance Sheet Data:
Total Assets $4,434,954 $3,556,386 $3,105,992 $2,201,648 $1,608,877
Long-Term Debt, Including
Current Maturities $ 789,904 $ 880,310 $ 708,097 $ 641,880 $ 335,283
Selected Quarterly Data (Unaudited) *
Three Months Ended January 31 October 31 July 31 April 30
Fiscal 1996
Net Sales $2,041,496 $2,193,239 $2,459,008 $1,906,498
Gross Margin 552,301 566,166 628,792 476,500
Net Earnings 55,626 75,183 114,279 47,062
Earnings Per Share-
Full Dilution $ .32 $ .43 $ .67 $ .28
Fiscal 1995
Net Sales $1,696,702 $1,765,992 $1,978,058 $1,634,690
Gross Margin 418,622 428,943 493,572 422,110
Net Earnings 38,175 43,919 85,007 58,926
Earnings Per Share-
Full Dilution $ .23 $ .27 $ .51 $ .36
Fiscal 1994
Net Sales $1,487,489 $1,579,005 $1,647,019 $1,397,008
Gross Margin 391,130 381,146 403,560 336,708
Net Earnings 46,265 54,191 71,351 51,753
Earnings Per Share-
Full Dilution $ .28 $ .33 $ .45 $ .34
* LIFO Adjustment:
Fiscal 1996 - The total LIFO effect for the year was a charge of $1.4
million. A charge of $10.5 million was made against earnings through the
first nine months, resulting in a fourth quarter charge of $9.1 million.
Fiscal 1995 - The total LIFO effect for the year was a charge of $8.3
million. A charge of $10.8 million was made against earnings through the
first nine months, resulting in a fourth quarter credit of $2.5 million.
Fiscal 1994 - The total LIFO effect for the year was a charge of $.4 million.
A charge of $9.5 million was made against earnings through the first nine
months, resulting in a fourth quarter credit of $9.1 million.
Page 38:
Lowe's Quarterly Stock Price Range and Cash Dividend Payment
Fiscal 1996 Fiscal 1995 Fiscal 1994
High Low Dividend High Low Dividend High Low Dividend
1st
Quarter $36 1/4 $29 3/8 $.050 38 7/8 $27 1/2 $.045 $36 1/2 $27 3/4 $.040
2nd
Quarter 39 28 5/8 .050 37 1/4 26 .045 37 3/4 30 1/2 .045
3rd
Quarter 43 5/16 32 3/8 .050 37 7/8 26 1/4 .050 40 7/8 30 .045
4th
Quarter $43 1/2 $31 5/8 $.055 $34 7/8 $27 7/8 $.050 $41 3/8 $33 1/8 $.045
Inside Back cover:
Lowe's Profile
Lowe's Companies, Inc. is the world's second largest home improvement
retailer, serving the do-it-yourself home improvement, home decor, home
repair, and home construction markets.
Lowe's 402 stores serve customers in 24 states located mainly in the East.
In 1996 our average store did $22.2 million in sales. Our large stores
averaged $26.1 million in sales.
At year-end, our retail sales space totaled approximately 30.4 million
square feet. Our employees numbered 53,492.
Lowe's has been a publicly owned company since October 6, 1961. Our stock
has been listed on the New York Stock Exchange since December 19, 1979; on
the Pacific Stock Exchange since January 26, 1981; and on the London Stock
Exchange since October 6, 1981. Shares are traded under the ticker symbol
LOW.
Appendix to EXHIBIT 13
Graphic and Image Material
Page 1 Two Individual Pictures
One each of Robert L. Strickland and Robert L. Tillman
Page 12 Two Charts
Top Ten World Powers of DIY Retailing
Rank Company Country 1996 Sales
US $Billions
1 The Home Depot United States $19.54
2 Lowe's United States 8.60
3 Castorama France 3.42*
4 OBI Germany 3.23
5 Menard United States 3.10
6 Canadian Tire Canada 2.77
7 Praktiker Germany 2.43*
8 Payless Cashways United States 2.64
9 Builders Square United States 2.55
10 B&Q United Kingdom $ 2.48
Source: National Home Center News
Conversion rates as of December 30, 1996
*Preliminary NHCN estimate
Lowe's Total Market Potential
Dollars in Billions
Home Center Market
Building Contractor Home Owner
New
Housing R&R* DIY Durables Total
2001e $75.4 $46.4 $121.2 $73.6 $316.6
2000e 73.5 45.3 113.8 68.6 301.2
1999e 71.3 44.1 108.7 64.2 288.3
1998e 68.4 42.8 103.8 60.7 275.7
1997e 67.5 41.5 99.3 59.4 267.7
1996e 67.8 40.3 95.1 58.3 261.5
1995 62.0 37.3 90.1 54.7 244.1
1994 61.4 38.0 87.7 48.1 235.2
1993 52.3 35.6 79.3 40.7 207.9
1992 45.5 33.0 73.9 35.8 188.2
1991 38.9 31.6 68.4 33.6 172.5
1990 45.1 35.7 69.8 33.0 183.6
1985 40.3 25.4 53.1 25.1 143.9
1980 24.4 15.6 38.1 13.9 92.0
1977 $26.8 $10.7 $27.5 $10.0 $75.0
*R&R=Repair and Remodel e=estimate p=preliminary
Source: Home Improvement Research Institute; Management Horizons
Page 13
Graph
Home Ownership Rate vs. Mortgage Rate Trends
Illustrated on a quarterly basis through 4th quarter 1996
Home Ownership % Mortgage Rates
1994
1st qtr 63.8 % 7.32 %
2nd qtr 63.8 8.44
3rd qtr 64.1 8.59
4th qtr 64.2 9.10
1995
1st qtr 64.2 % 8.81 %
2nd qtr 64.7 7.95
3rd qtr 65.0 7.69
4th qtr 65.1 7.35
1996
1st qtr 65.1 % 7.26 %
2nd qtr 65.4 8.11
3rd qtr 65.6 8.16
4th qtr 65.4 7.70
Source: Bureau of the Census, "Current Housing Reports";
Department of Housing and Urban Development
Chart
Merchandise Sales Trends
Dollars in Millions
Base Year
Change 1996 1995 1994 1990
Total Sales From Total Total Total Total
6-Year CGR 1995 Sales % Sales % Sales % Sales %
Category
+10% 1.Structural Lumber - 3% $ 815 9 $ 839 12 $ 930 15 $ 466 16
+12 2.Building Commodities
& Millwork +24 1,866 21 1,508 22 1,457 24 969 34
+39 3.Home Decor +36 528 6 388 5 303 5 73 3
+19 4.Major Appliances/
& Kitchens +14 992 12 871 12 717 12 355 12
+30 5.Paint & Sundries +31 645 8 493 7 386 6 133 5
+27 6.Plumbing +28 776 9 607 9 480 8 185 7
+30 7.Electrical +26 707 8 559 8 442 7 148 5
+32 8.Power Tools +34 487 6 364 5 301 5 94 3
+28 9.Hardware +28 493 6 386 5 290 5 110 4
+23 10.Nursery & Gardening +19 728 8 610 9 497 8 213 8
+37 11.Outdoor Hardlines +25 563 7 450 6 308 5 87 3
+20% Totals +22% $8,600 100 $7,075 100 $6,111 100 $2,833 100
Page 18 Individual Pictures of the Directors
William A. Andres, John M. Belk, Carol A. Farmer, Paul Fulton, James F. Halpin,
Leonard G. Herring, Petro Kulynych, Russell B. Long, Claudine B. Malone,
Robert G Schwartz, Robert L. Strickland, Robert L. Tillman
Page 19 Individual picture of Gordon Cadwgan with the following caption:
Gordon Cadwgan has been a true friend and trusted advisor to Lowe's ever since
he helped take our company public in 1961. Through the decades his cool head
and warm heart have been among our most valuable corporate assets. He retired
from Lowe's board in 1996 and was elected director emeritus. We wish him all
the benefits of a long and happy retirement.
Page 25 Two graphs below the statements of current and retained earnings.
1989-1995 Sales and Earnings*
Percent of Total Year -- A Six-Year Average
Quarter Sales % Earnings %
1 23 23
2 28 36
3 25 23
4 24 18
* 1991 is not included in the analysis
because the restructuring charge distorts results.
Comparable Store Sales1
Dollars in millions
Sales %
Quarter 1996 1995 Change
1 $1.540 $1.521 +1
2 1.998 1.846 +8
3 1.801 1.637 +10
4 1.687 1.590 +6
1 Comparable store: stores open more
than 1 year with comparable square footage.
Inside back cover Map and Chart describing location of Lowe's stores.
State # of stores
Alabama 16
Arkansas 7
Delaware 3
Florida 14
Georgia 19
Iowa 3
Illinois 11
Indiana 18
Kentucky 19
Louisiana 13
Maryland 11
Michigan 6
Mississippi 7
Missouri 5
North Carolina 69
New York 1
Ohio 34
Oklahoma 8
Pennsylvania 17
South Carolina 24
Tennessee 25
Texas 23
Virginia 36
West Virginia 13