Edgar Filing: LOWES COMPANIES INC

LOWE'S FORM 10-K/A FEBRUARY 3, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________ to _________

Commission file number 1-7898

LOWE'S COMPANIES, INC.

(Exact name of registrant as specified in its charter)

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

1000 Lowe's Blvd., Mooresville, NC	28117
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code	(704) 758-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $.50 Par Value		New York Stock Exchange (NYSE)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes

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

Yes

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

As of July 29, 2005, the last business day of the Company's most recent second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $44.3 billion based on the closing sale price as reported on the New York Stock Exchange.

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

CLASS		OUTSTANDING AT MARCH 31, 2006
Common Stock, $.50 par value		1,551,613,794

DOCUMENTS INCORPORATED BY REFERENCE

Document		Parts Into Which Incorporated
Portions of Lowe’s 2005 Annual Report to Shareholders		Parts I and II
Portions of the Proxy Statement for Lowe’s 2006 Annual Meeting of Shareholders		Part III

Explanatory Statement

Why we are filing this Amendment to our Form 10-K

We are filing this amendment to our Annual Report on Form 10-K for the fiscal year ended February 3, 2006 (“2005 10-K”) to restate our consolidated financial statements and related disclosures to correct the method of accounting for early payment discounts on merchandise purchases as discussed in Note 2 to the consolidated financial statements.

Method of accounting for early payment discounts on merchandise purchases

During the first quarter of 2006, we reviewed the method of accounting we have historically used for early payment discounts on our merchandise purchases. Upon completing that review, management determined we should recognize early payment discounts initially as a reduction of inventory cost and then as a reduction to cost of sales in the period when the related inventory is sold. We had previously recognized them as a financing component of our merchandise purchases by reducing cost of sales in the period when we purchased the related products.

The restatement of our prior period financial statements to reflect this change in method of accounting for early payment discounts reduces our net earnings by $6 million, $9 million and $22 million in fiscal years 2005, 2004 and 2003, respectively, from the amounts we previously reported and reduces beginning retained earnings in fiscal 2003 by $6 million. The restatement does not affect total operating, investing or financing cash flows that we previously reported for those fiscal years. Additional information regarding the effect of the restatement to reflect this change is included in Note 2 of our restated consolidated financial statements included in this amendment.

Adjustments to reflect the stock split

The Board of Directors approved a 2-for-1 stock split on May 25, 2006 with a record date of June 16, and an effective date of June 30, 2006. The post-split par value of a share of Lowe’s common stock remains $0.50 per share. In this amendment, we have adjusted all common share and per common share amounts in our restated prior period consolidated financial statements and related disclosures to reflect the stock split.

Amended Items of Form 10-K

We are amending the following items of our 2005 10-K:

·	Part II - Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

·	Part II - Item 6 - Selected Financial Data

·	Part II - Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

·	Part II - Item 8 - Financial Statements and Supplementary Data

·	Part II - Item 9A - Controls and Procedures

·	Part IV - Item 15 - Exhibits and Financial Statement Schedules

All information not affected by restatement or stock split is unchanged

We have not changed any information included in our 2005 10-K that is not affected by the restatement or the adjustment for the stock split. Accordingly, the information included in our 2005 10-K and included in this amendment that is not affected by these items describes conditions as they existed and were presented in our 2005 10-K at the time we filed that report with the Securities and Exchange Commission on April 7, 2006. We have not taken into account any other events occurring after the original filing of our 2005 10-K that might have affected those disclosures, nor have we modified or updated those disclosures, including the exhibits to our 2005 10-K, to reflect any other subsequent events. Accordingly, you should, in conjunction with reading this amendment to our 2005 10-K, also read our quarterly reports on Form 10-Q and all other filings we have made with the Securities and Exchange Commission since April 7, 2006.

LOWE’S COMPANIES, INC.

- INDEX -


PART II			Page No.

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	5

	Item 6.	Selected Financial Data	6-8

	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9-22

	Item 8.	Financial Statements and Supplementary Data	23-49

	Item 9A.	Controls and Procedures	50

PART IV

	Item 15.	Exhibits and Financial Statement Schedules	51-55

Part II

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Lowe's common stock is traded on the New York Stock Exchange (NYSE). The ticker symbol for Lowe's is “LOW”. As of March 31, 2006, there were 27,819 holders of record of Lowe's common stock. The table below sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by the NYSE Composite Tape and the dividends per share declared on the common stock during such periods. These amounts have been adjusted to reflect the 2-for-1 stock split effective June 30, 2006.

Lowe's Quarterly Stock Price Range and Cash Dividend Payment

	Fiscal 2005						Fiscal 2004						Fiscal 2003
	High		Low		Dividend		High		Low		Dividend		High		Low		Dividend
1st Quarter	$	29.98	$	25.36	$	0.020	$	29.33	$	25.85	$	0.015	$	23.00	$	16.68	$	0.013
2nd Quarter		33.50		25.93		0.030		28.08		23.84		0.020		24.35		19.10		0.013
3rd Quarter		34.47		28.91		0.030		28.87		22.95		0.020		29.97		22.77		0.015
4th Quarter	$	34.85	$	29.82	$	0.030	$	30.27	$	27.52	$	0.020	$	30.21	$	25.37	$	0.015

The following table sets forth information on the Company’s common stock repurchase program based on trade date for the quarter ended February 3, 2006:

Issuer Purchases of Equity Securities
(In millions, except average price paid per share)	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
October 29, 2005 - November 25, 2005		8.5	$	33.06		8.5	$	226
November 26, 2005 - December 30, 2005		-		-		-		226
December 31, 2005 - February 3, 2006		-		-		-		1,226

As of February 3, 2006		8.5	$	33.06		8.5	$	1,226

(1)

During the fourth quarter of fiscal 2005, the Company repurchased an aggregate of 8,449,400 shares of its common stock pursuant to the repurchase program publicly announced on January 28, 2005 (the “Program”). The total number of shares purchased also includes a nominal amount of shares repurchased from employees to satisfy the exercise price of certain stock option exercises.

(2)

On January 28, 2005, the Board of Directors approved the Program under which the Company is authorized to repurchase up to $1 billion of the Company’s common stock. The Program expires at the end of fiscal year 2006. In January 2006, the Board of Directors authorized up to an additional $1 billion in share repurchases through 2007.

Item 6 - Selected Financial Data

LOWE’S COMPANIES, INC.

SELECTED FINANCIAL DATA (Unaudited)

(In Millions, Except Per Share Data)	2005⁽¹⁾ As Restated⁽²⁾		2004 As Restated⁽²⁾		2003 As Restated⁽²⁾		2002 As Restated⁽²⁾		2001
Selected Statement of Earnings Data:
Net Sales	$	43,243	$	36,464	$	30,838	$	26,112	$	21,714
Gross Margin		14,790		12,240		9,533		7,915		6,265
Earnings from Continuing Operations		2,765		2,167		1,807		1,473		969
Earnings from Discontinued Operations, Net of Tax		-		-		15		12		13
Net Earnings		2,765		2,167		1,822		1,485		982
Basic Earnings Per Share - Continuing Operations		1.78		1.39		1.15		0.94		0.63
Basic Earnings Per Share - Discontinued Operations		-		-		0.01		0.01		0.01
Basic Earnings Per Share		1.78		1.39		1.16		0.95		0.64
Diluted Earnings Per Share - Continuing Operations		1.73		1.35		1.12		0.92		0.61
Diluted Earnings Per Share - Discontinued Operations		-		-		0.01		0.01		0.01
Diluted Earnings Per Share		1.73		1.35		1.13		0.93		0.62
Dividends Per Share	$	0.11	$	0.08	$	0.06	$	0.04	$	0.04

Selected Balance Sheet Data:
Total Assets	$	24,639	$	21,101	$	18,667	$	15,790	$	13,546
Long-Term Debt, Excluding Current Maturities	$	3,499	$	3,060	$	3,678	$	3,736	$	3,734

Selected Quarterly Data:

	First				Second				Third				Fourth⁽¹⁾
(In Millions, Except Per Share Data)	As Previously Reported		As Restated⁽²⁾		As Previously Reported		As Restated⁽²⁾		As Previously Reported		As Restated⁽²⁾		As Previously Reported		As Restated⁽²⁾
2005
Net Sales	$	9,913	$	9,913	$	11,929	$	11,929	$	10,592	$	10,592	$	10,808	$	10,808
Gross Margin		3,404		3,398		4,026		4,027		3,584		3,580		3,786		3,785
Net Earnings		590		586		838		839		649		646		694		693
Basic Earnings Per Share		0.38		0.38		0.54		0.54		0.42		0.41		0.44		0.44
Diluted Earnings Per Share	$	0.37	$	0.37	$	0.52	$	0.52	$	0.41	$	0.40	$	0.44	$	0.43

	First				Second				Third				Fourth
(In Millions, Except Per Share Data)	As Previously Reported		As Restated⁽²⁾		As Previously Reported		As Restated⁽²⁾		As Previously Reported		As Restated⁽²⁾		As Previously Reported		As Restated⁽²⁾
2004
Net Sales	$	8,681	$	8,681	$	10,169	$	10,169	$	9,064	$	9,064	$	8,550	$	8,550
Gross Margin		2,860		2,850		3,378		3,380		3,040		3,033		2,978		2,977
Net Earnings		452		446		700		701		516		512		508		508
Basic Earnings Per Share		0.29		0.28		0.45		0.45		0.33		0.33		0.33		0.33
Diluted Earnings Per Share	$	0.28	$	0.27	$	0.44	$	0.44	$	0.32	$	0.32	$	0.32	$	0.32

Note: The selected financial data reflects the 2003 disposal of the Contractor Yards as a discontinued operation for all periods. Additionally, per share amounts have been adjusted to reflect the 2-for-1 stock split effective June 30, 2006.

⁽¹⁾ The fourth quarter of fiscal 2005 contained an additional week. Therefore fiscal 2005 contained 53 weeks, while all other years contained 52 weeks.

⁽²⁾Amounts have been restated, refer to Note 2 to the consolidated financial statements.

Sales by Product Category:

(Dollars in Millions)	2005				2004				2003
Product Category	Total Sales		%		Total Sales		%		Total Sales		%
Appliances	$	4,030		9%	$	3,248		9%	$	2,795		9%
Lumber		3,692		9		3,308		9		2,669		9
Millwork		2,950		7		2,439		7		2,044		7
Flooring		2,901		7		2,370		7		2,000		6
Paint		2,774		6		2,317		6		2,048		7
Building Materials		2,759		6		2,233		6		1,833		6
Fashion Plumbing		2,622		6		2,167		6		1,860		6
Tools		2,432		6		2,138		6		1,813		6
Lighting		2,415		6		2,089		6		1,857		6
Seasonal Living		2,210		5		1,972		5		1,610		5
Hardware		2,121		5		1,785		5		1,497		5
Lawn & Landscape Products		2,055		5		1,794		5		1,561		5
Cabinets & Countertops		1,832		4		1,428		4		1,053		3
Outdoor Power Equipment		1,830		4		1,511		4		1,211		4
Rough Plumbing		1,416		3		1,161		3		981		3
Rough Electrical		1,203		3		977		3		791		3
Walls / Windows		1,058		3		911		3		808		3
Home Environment		1,021		2		835		2		727		2
Nursery		976		2		857		2		775		2
Home Organization		946		2		793		2		670		2
Other		-		-		131		-		235		1
Totals	$	43,243		100%	$	36,464		100%	$	30,838		100%

Lowe's Stores by State:

(As of February 3, 2006)
Alabama	31	Indiana	39	Nebraska	3	South Carolina	38
Alaska	4	Iowa	9	Nevada	12	South Dakota	1
Arizona	18	Kansas	9	New Hampshire	4	Tennessee	47
Arkansas	16	Kentucky	32	New Jersey	29	Texas	107
California	69	Louisiana	23	New Mexico	8	Utah	9
Colorado	19	Maine	3	New York	35	Virginia	52
Connecticut	7	Maryland	22	North Carolina	84	Washington	25
Delaware	6	Massachusetts	15	North Dakota	3	West Virginia	18
Florida	78	Michigan	41	Ohio	68	Wisconsin	6
Georgia	53	Minnesota	4	Oklahoma	24	Wyoming	1
Hawaii	3	Mississippi	20	Oregon	11	Total Stores	1,234
Idaho	7	Missouri	28	Pennsylvania	57
Illinois	30	Montana	3	Rhode Island	3

Item 7 - 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 and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended February 3, 2006 (our fiscal years 2005, 2004, and 2003). Fiscal year 2005 contains 53 weeks of operating results compared to fiscal years 2004 and 2003 which contain 52 weeks. Unless otherwise noted, all references herein for the years 2005, 2004 and 2003 represent the fiscal years ended February 3, 2006, January 28, 2005 and January 30, 2004, respectively. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in this annual report.

As described in Note 2 to the consolidated financial statements, during the first quarter of fiscal 2006, we reviewed our method of accounting for early payment discounts on merchandise purchases and determined we should recognize these discounts initially as a reduction of inventory cost and then as a reduction to cost of sales in the period when the related inventory is sold. We previously recognized early payment discounts as a financing component of merchandise purchases by reducing cost of sales when the related product was purchased. Prior period financial statements have been restated for the timing of recognition of early payment discounts. Information presented for fiscal years 2005, 2004 and 2003 in the accompanying Management’s Discussion and Analysis reflects such restatement.

The Board of Directors approved a 2-for-1 stock split of our common shares on May 25, 2006. The stock split was effective June 30, 2006 to shareholders of record on June 16, 2006. All prior period common share and per common share amounts have been retroactively adjusted to reflect the 2-for-1 stock split.

During the fourth quarter of fiscal 2003, we sold 26 commodity-focused locations operating under The Contractor Yard name (the “Contractor Yards”). This sale was effected to allow us to continue to focus on our retail and commercial business. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have reported the results of operations of the Contractor Yards in discontinued operations for fiscal year 2003.

EXECUTIVE OVERVIEW

Our vision is to be our customers’ first choice for home improvement in each and every market we serve. This focus on the customer drives our operational, merchandising, marketing and distribution initiatives and helps fuel growth in our existing stores.

We are also focused on expanding our share of the home improvement market through geographic expansion and the expansion of our customer base, and we believe that providing excellent customer service is imperative to our future growth.

Following is a summary of certain key initiatives that we believe will allow us to achieve our vision and expand our share of the home improvement market.

Focusing on our customers

Customer service - Having the right foundation of talented and tenured employees is integral to providing excellent customer service and fueling our growth strategy. To ensure our success, we continue to implement training and development programs for our store employees to help better serve our customers. We also continue to enhance our staffing model to optimize store labor, while positioning more sales people in the aisles to take care of customers.

Meeting customers’ specific needs - We are focusing on our customers by providing the products and services they want. Over the last five years, we have moved beyond merely sourcing, stocking and selling products to consumers for their home repair and improvement needs. We have become an integrated provider of home repair and improvement solutions. We help customers plan home repair and improvement projects using automated systems to identify the products needed for the project, sell those products to the customer, and arrange for installation at the customer’s home. We evaluate the demographics of our markets and obtain customer feedback to identify areas where we can provide products or services to specifically meet customers’ needs. Our “Big 3” sales initiatives are designed to meet specific needs of customers and have helped bring more customers into our stores, delivering comparable store sales results that are well above our overall company average.

Installed Sales - As baby boomers shift to do-it-for-me (DIFM) from do-it-yourself (DIY), the opportunity for continued growth in Installed Sales increases. To capitalize on the growing DIFM segment, we will continue to expand installation services such as roofing, window replacements, fencing and siding to meet customer demand. To meet the needs of the DIFM customer, we are testing and evaluating an in-home sales model that is staffed with in-market sales teams who have expertise in evaluating and pricing installed projects at a customer’s home. Our initial results are favorable and we will continue to evaluate this program during 2006. Sales of installed products and services were $2.6 billion in 2005, a 31% increase over the previous year.

Special Order Sales (SOS) - Customers want to express their individuality through their homes, and as a result, we continue to enhance our special order product offering. We are making the SOS process easier for customers by enhancing ordering systems storewide, providing easy-to-use customer interfaces, integrated design tools, and electronic product catalogs. Employees utilized our electronic catalog program to process over 70% of our Special Order Sales last year. This allows us to add more product choices and reduces paper work for our stores, which increases the accuracy of the ordering process. Special Order Sales, which have some degree of overlap with Installed Sales, were $3.9 billion in 2005, a 25% increase over the prior year.

Commercial Business Customer (CBC) - Over 25% of our total sales in 2005 were to Commercial Business Customers, a category including repair and remodelers, property management professionals, and a variety of professional trades people. Our concerted effort to build strong relationships with these customers and to staff our stores with well-trained commercial sales specialists is leading to increasing sales of products throughout the store. In 2005, we completed the rollout of the Regional Commercial Sales Manager (RCSM) program. The RCSM teaches, trains and shares best practices throughout our stores. The RCSM also ensures consistent execution of our lead management process and delivery programs. Our commercial sales desk is staffed with trained commercial sales specialists who provide the service and knowledge that commercial customers require and continue to build strong relationships with these customers.

Everyday Low Prices (EDLP) - We know that providing Everyday Low Prices is important to customers. Our promise to customers is if they find a lower everyday or advertised price on an identical stock product at a local competitor, we will not only match that price, but we will beat it by 10 percent. To maintain our EDLP strategy and offer the high-quality products that customers demand, our merchants are constantly working with our vendors to develop new and innovative products for our customers. We also use our Global Sourcing offices to assist us in sourcing products that offer design exclusivity and allow us to develop our own proprietary brands. This gives us an opportunity to reduce inventory costs and at the same time gives us more control over product quality. In 2005, imports grew at almost twice the rate of our total sales increase. We expect imports to continue to grow.

Investing in our infrastructure - In order to provide customers with a more inviting shopping experience, during 2005 we continued our history of investing in our existing stores. This includes relamping our stores at regular intervals to ensure they remain bright, adding new displays, improving point-of-sale and directional signage, adding more product selection, repainting building exteriors, and re-striping parking lots. Additionally, our investment in bilingual signage and point-of-purchase materials continues to attract and retain the growing population of multicultural customers. We invested approximately $650 million in existing stores in 2005.

In addition to our commitment to invest and improve our stores, we are committed to improving our supply chain infrastructure to ensure we have the right products, in the right stores, at the right time. Our Rapid Response Replenishment (R3) initiative allows us to both maintain and improve our in-stock position while driving greater efficiencies and flexibility in the total supply chain infrastructure. When we began this initiative in 2004, approximately 50% of our stock product was moving through our distribution network. We now have appliances in eight regional distribution centers (RDC), along with riding mowers, lawn and garden chemicals and fashion plumbing items moving through all RDCs. Today about 70% of stock product flows through our distribution network, and we are well positioned to achieve our goal of 75% by the end of 2006.

Indicators of our success - We monitor several metrics to measure the success of our initiatives. These metrics include comparable store sales, average ticket and customer transactions. We experienced a comparable store sales increase of 6.1% in 2005, which was on top of comparable store sales increases of 6.6% in 2004 and 6.7% in 2003. This reflects a three-year average comparable store sales increase of 6.5%. The comparable store sales increase in 2005 was driven by increases in both average ticket and transactions. Average ticket for comparable stores increased approximately 6.1% in 2005, and comparable store customer transactions increased slightly. We believe our strong financial results in 2005, as evidenced by these metrics, indicate the success of our key initiatives and the progress we are making to achieve our vision.

Expanding our geographic and customer base

Geographic expansion - We continue to pursue opportunities to expand our business into additional geographic markets, customer groups and product categories. We opened 150 stores in 2005 and ended the year with 1,234 stores in 49 states. We plan to open 155 stores in 2006, increasing total square footage by approximately 12%. Approximately 50% of these stores will be in our under-penetrated Northeast and West divisions. We will balance our metro expansion with the opportunities presented in smaller markets, many of which are ideal locations for our 94,000-square-foot (94K) prototype. In addition, in June of 2005, we announced future expansion into Canada, with plans to open six to 10 stores in the Greater Toronto Area in 2007.

The percentage of our stores located in the nation’s top 25 and top 100 markets is increasing (28% and 55%, respectively, at the end of 2005). These markets are more competitive, but offer the opportunity to capture significant market share from direct competitors and other sales channels for our products and expanding service offerings. More than 35% of the 400 approved projects for our future expansion are located in the nation’s top 25 markets and more than 65% are located in the nation’s top 100 markets.

We also continue to invest in our distribution network to support our growth, including opening one additional regional distribution center during 2005 in Plainfield, Connecticut. At February 3, 2006, we owned and operated 11 RDCs. We expect to open additional RDCs in Rockford, Illinois and Lebanon, Oregon in 2007. In addition, we plan to expand three existing distribution centers in Valdosta, Georgia, Statesville, North Carolina and North Vernon, Indiana by spring 2006. At February 3, 2006, we also owned and operated 10 flatbed distribution centers and leased and operated two flatbed distribution centers for the handling of lumber, building materials and other long-length items. We expect to open four additional flatbed distribution centers in 2006.

Customer base expansion - We are pursuing additional opportunities for expansion of our customer base through multicultural marketing. While total homeownership rose to approximately 69% in 2004, Hispanic homeownership grew at three times the average rate. In addition, over the next 10 years, Harvard’s Joint Center for Housing estimates immigration will represent at least 40% of household formation. Therefore, during 2005, we continued to produce marketing and communications designed to reach specific cultural segments of the population, including the growing Hispanic and African-American home improvement consumer segments. Our significant investment in bilingual signage and point-of-purchase materials continues to attract and retain the growing population of diverse customers. We also provide a translation service via telephone at the customer service desk in each of our stores, making communication easier for non-English speaking customers.

We are also expanding our business by growing market share in product categories previously sold exclusively or largely through other sales channels, including major appliances. According to independent measures, we increased our unit share in major appliances by 130 basis points for calendar year 2005 versus calendar year 2004. Our success in appliances is a function of our brand selection and knowledgeable sales specialists. Independent research confirms we are experiencing similar results in outdoor power equipment. In both of these categories in 2005 we expanded our line of brands to include Samsung digital kitchen appliances and John Deere mowers.

External factors that impact our business

The home improvement market is large and fragmented. While we are the world’s second-largest home improvement retailer, we have captured a relatively small portion of the overall home improvement market. We estimate the size of the U.S. home improvement market to be approximately $700 billion, comprised of $550 billion of product demand and $150 billion for the installed labor opportunity. This estimate includes import and export data and key end-use markets, such as residential repair and remodeling, and nonresidential construction and maintenance. This data also captures a wide range of categories relevant to our business, including major appliances and garden supplies. We believe the current home improvement market provides ample opportunity to support our growth plans.

As we continue to monitor economic data and the home improvement marketplace, we believe there will be continued strength in consumer demand for the products and services we offer. The key economic indicators that we monitor include personal income, employment growth, housing turnover and homeownership levels. Demographic and societal trends also remain supportive of home improvement industry growth.

§	Personal income continues to grow, which is supported by data from the February 2006 Blue Chip Economic Indicators™, which forecasts real disposable income growth of 3.4% for calendar 2006, compared with 1.4% in calendar 2005.

§	Employment growth is also a strong indicator of home improvement sales. The relatively low unemployment rate suggests Americans will likely be more confident in calendar 2006 about employment prospects than in the past several years.

§	Housing turnover is expected to continue at a historically high pace according to The National Association of Realtors®, which forecasts calendar 2006 housing turnover to be the third strongest year on record.

§	Near-record U.S. homeownership levels provide an established customer base for home maintenance and repair projects. The vast majority of our customers are homeowners, and they are not willing to let what is often their most valuable financial asset deteriorate.

Such factors contribute to our belief that the home improvement industry will continue to support the growth of our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements and notes to consolidated financial statements presented in this annual report that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

Our significant accounting policies are described in Note 1 to the consolidated financial statements. We believe that the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements.

Merchandise Inventory

Description

We record an inventory reserve for the loss associated with selling discontinued inventories below cost. This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience relating to the liquidation of discontinued inventory. During 2005, we increased our discontinued inventory reserve by $27 million to $104 million as of February 3, 2006. We also record an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrinkage results from previous physical inventories. During 2005, we increased our inventory shrinkage reserve by $19 million to $113 million as of February 3, 2006.

Judgments and Uncertainties Involved in the Estimate

We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term, and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional reserves. Likewise, changes in actual shrinkage results from completed physical inventories could result in revisions to previously estimated shrinkage expense.

Effect if Actual Results Differ from Assumptions

Although we believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves, it is possible that actual results could differ from recorded reserves. A 10% difference in our discontinued inventory reserve would have affected net earnings by approximately $6 million for 2005. A 10% difference in our estimated shrinkage reserve would have affected net earnings by approximately $7 million for 2005.

Vendor Funds

Description

We receive funds from vendors in the normal course of business for a variety of reasons, including purchase-volume-related discounts and rebates, advertising allowances, reimbursements for third-party in-store service related costs, defective merchandise allowances, reimbursements for selling expenses and display costs, and early payment discounts on merchandise purchases. When necessary, we use projected purchase volumes to estimate accrual rates, validate those projections based on actual purchase trends and apply those rates to actual purchase volumes to determine the amount of funds accrued and receivable from the vendor.

Under Emerging Issues Task Force Issue No. 02-16 (EITF 02-16), “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” vendor funds are treated as a reduction of inventory cost, unless they represent a reimbursement of specific, incremental and identifiable costs incurred by the customer to sell the vendor’s product. Substantially all of the vendor funds that we receive do not meet the specific, incremental and identifiable criteria in EITF 02-16. Therefore, for vendor fund agreements entered into after December 31, 2002, which was the effective date of the related provision of EITF 02-16, we treat funds that do not meet the specific, incremental and identifiable criteria as a reduction in the cost of inventory and recognize these funds as a reduction of cost of sales when the inventory is sold. Prior to the adoption of EITF 02-16, cooperative advertising allowances and third-party in-store service funds were recorded as an offset to the related expense in Selling, General and Administrative (SG&A) expense.

Judgments and Uncertainties Involved in the Estimate

Amounts accrued could be impacted if actual purchase volumes differ from projected purchase volumes.

Effect if Actual Results Differ from Assumptions

If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory. Changes in these estimates would have a greater effect on interim periods than our annual results, as purchase volume estimates are updated for actual purchase volumes at each year end.

Self-Insurance

Description

We are self-insured for certain losses relating to workers’ compensation, automobile, property, general and product liability, and certain medical and dental claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. The self-insurance liability was $571 million and $467 million at February 3, 2006 and January 28, 2005, respectively.

Judgments and Uncertainties Involved in the Estimate

These estimates are subject to changes in the utilized discount rate, forecasted payroll, sales and vehicle units, as well as the frequency and severity of claims.

Effect if Actual Results Differ from Assumptions

Although we believe that we have the ability to adequately record estimated losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. A 10% difference in our self-insurance liability would have affected net earnings by approximately $35 million for 2005. A 1% change in our discount rate would have affected net earnings by approximately $8 million for 2005.

Long-Lived Assets

Description

Losses related to impairment of long-lived assets are recognized when circumstances indicate the carrying values of the assets may not be recoverable. We periodically review the carrying value of long-lived assets for potential impairment. When we commit to close or relocate a store location, or when there are indicators that the carrying value of a long-lived asset may not be recoverable, we evaluate the carrying value of the asset in relation to its expected undiscounted future cash flows. If the carrying value of the asset is greater than the expected undiscounted future cash flows and the fair value of the asset is less than the carrying value, a provision is made for the impairment of the asset based on the excess of carrying value over fair value. We recorded long-lived asset impairment charges of $16 million during 2005. The net carrying value for relocated stores, closed stores and other excess property totaled $63 million and $56 million at February 3, 2006 and January 28, 2005, respectively.

Judgments and Uncertainties Involved in the Estimate

Our impairment loss calculations require us to apply judgment in estimating asset fair values and future cash flows, including estimated sales and earnings growth rates and assumptions about market performance.

Effect if Actual Results Differ from Assumptions

If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, actual impairment losses could vary positively or negatively from estimated impairment losses.

OPERATIONS

The following table sets forth the percentage relationship to net sales of each line item of the consolidated statements of earnings, as well as the percentage change in dollar amounts from the prior year. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.

							Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year ¹			Percentage Increase / (Decrease) in Dollar Amounts from Prior Year ¹
	2005			2004			2005 vs. 2004			2005 vs. 2004
Net Sales		100.00	%		100.00	%		N/A			19	%
Gross Margin		34.20			33.56			64			21
Expenses:
Selling, General and Administrative		20.84			20.74			10			19
Store Opening Costs		0.33			0.34			(1	)		15
Depreciation		2.27			2.35			(8	)		14
Interest		0.37			0.48			(11	)		(10	)
Total Expenses		23.81			23.91			(10	)		18
Pre-Tax Earnings		10.39			9.65			74			28
Income Tax Provision		4.00			3.71			29			28
Net Earnings		6.39	%		5.94	%		45			28	%

							Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year			Percentage Increase / (Decrease) in Dollar Amounts from Prior Year
	2004			2003			2004 vs. 2003			2004 vs. 2003
Net Sales		100.00	%		100.00	%		N/A			18	%
Gross Margin		33.56			30.92			264			28
Expenses:
Selling, General and Administrative		20.74			18.09			265			36
Store Opening Costs		0.34			0.42			(8	)		(4	)
Depreciation		2.35			2.40			(5	)		16
Interest		0.48			0.58			(10	)		(2	)
Total Expenses		23.91			21.49			242			32
Pre-Tax Earnings		9.65			9.43			22			21
Income Tax Provision		3.71			3.57			14			23
Earnings from Continuing Operations		5.94			5.86			8			20
Earnings from Discontinued Operations, Net of Tax		-			0.05			(5	)		(100	)
Net Earnings		5.94	%		5.91	%		3			19	%

Other Metrics	2005			2004			2003
Comparable Store Sales Increases ²		6.1	%		6.6	%		6.7	%
Customer Transactions (in millions)		639			575			521
Average Ticket ³	$	67.67		$	63.43		$	59.21

At End of Year:
Number of Stores		1,234			1,087			952
Sales Floor Square Feet (in millions)		140			124			109
Average Store Size Square Feet (in thousands)		113			114			114
Return on Beginning Assets ⁴		13.1	%		11.6	%		11.5	%
Return on Beginning Shareholders' Equity ⁵		24.0	%		21.3	%		22.2	%

¹The fiscal year ended February 3, 2006 had 53 weeks. The fiscal years ended January 28, 2005 and January 30, 2004 had 52 weeks.

² We define a comparable store as a store that has been open longer than 13 months. A store that is identified for relocation is no longer considered comparable one month prior to its relocation. The relocated store must then remain open greater than 13 months to be considered comparable. The comparable store sales increase for 2005 included in the preceding table was calculated using sales for a comparable 53-week period.

³ We define average ticket as net sales divided by number of customer transactions.

⁴Return on beginning assets is defined as net earnings divided by beginning total assets.

⁵ Return on beginning shareholders’ equity is defined as net earnings divided by beginning shareholders’ equity.

Fiscal 2005 Compared to Fiscal 2004

For the purpose of the following discussion, comparable store sales, comparable store average ticket and comparable store customer transactions are based on comparable 53-week periods.

Net sales - Comparable store sales, our ongoing store expansion and relocation program and continued growth in our three specialty sales initiatives were key drivers of our sales increase in 2005. We opened 150 stores in 2005, including three relocations, and ended the year with stores in 49 states, including our first stores in New Hampshire. The additional week in 2005 resulted in approximately $750 million in sales and impacted 2005 sales growth by about 2.1%.

The comparable store sales increase of 6.1% in 2005 was on top of comparable store sales increases of 6.6% in 2004 and 6.7% in 2003. This reflects a three year average comparable store sales increase of 6.5%. The comparable store sales increase in 2005 was driven by increases in both average ticket and transactions. Average ticket for comparable stores increased 6.1% and comparable store customer transactions increased slightly.

We experienced comparable store sales increases in every product category for 2005. The categories that performed above our average comparable store sales increase for 2005 included millwork, rough plumbing, building materials, rough electrical, outdoor power equipment, appliances, home environment, paint, flooring and cabinets & countertops. In addition, hardware and fashion plumbing performed at approximately the average comparable store sales increase. Inflation in lumber and building materials favorably impacted comparable store sales for 2005 by approximately 50 basis points, driven by gypsum, roofing and cement products. We also continue to gain market share in key product categories previously dominated by other channels including appliances, outdoor power equipment and cabinets & countertops.

The appliance category delivered a double-digit comparable store sales increase for 2005. According to independent measures, we increased our unit share in major appliances by 130 basis points for calendar year 2005 versus calendar year 2004. Our success in appliances is a function of our brand selection and knowledgeable sales specialists. The recent introduction of Samsung digital appliances is evidence of our commitment to enhance our brand selection and competitive offering.

We experienced a double-digit comparable store sales increase for 2005 in cabinets & countertops, which was driven by emphasis on our product offering, as well as our focus on our Installed Sales initiative, which plays a key role in driving cabinets & countertop sales.

Outdoor power equipment delivered a high single-digit comparable store sales increase for the year. We continue to enhance our portfolio of outdoor power equipment. The addition of John Deere is expected to increase sales in this category and provide further selection of quality products for our customers. According to independent measures, we increased our outdoor power equipment unit share by 190 basis points for calendar year 2005 versus calendar year 2004.

We also experienced comparable store sales increases in 18 of the 21 geographic regions. We continue to experience strong sales in Florida and the Gulf Coast regions as customers repair the damage caused by the hurricanes in 2005 and 2004. We experienced comparable store sales decreases in two Northeastern regions that had a slow, weather-affected start in the first quarter and never fully recovered. In addition, certain areas of our North Central division suffered from headline-making layoffs and plant closings, which contributed to these decreases in comparable store sales. We believe that our stores in these regions will experience improved performance in 2006.

The growth in our specialty sales initiatives, which include Installed Sales, Special Order Sales and Commercial Business Customer sales, also drove our sales increase in 2005. Our focus on execution under our Installed Sales model led to a 31% increase in Installed Sales over 2004. Our Installed Sales consist of both stock and special order product for which we arrange installation for our customers. Our growth in 2005 was driven by sales in cabinets & countertops, flooring and millwork. Special Order Sales increased 25% over 2004. We believe SOS will provide further growth opportunity, as we continue to enhance our offering to meet customers’ desires to express their individuality. Finally, we experienced double-digit comparable store sales increases from Commercial Business Customers. Strengthening customer relationships, supported by targeted marketing and market-specific merchandising assortments, continue to drive this part of our business.

Gross margin - For 2005, gross margin of 34.20% represented a 64 basis point increase over 2004. Approximately 40 basis points of the increase in gross margin as a percentage of sales for 2005 was due to the impact of the implementation of EITF 02-16 as it related to cooperative advertising and in-store services, which reduced gross margin in 2004 as these funds were capitalized into inventory and recognized in income when the product was sold. The increase in 2005 gross margin was also driven by growth in imported goods, improvements in inventory shrink and positive sales mix impact.

SG&A - The increase in SG&A expenses as a percentage of sales from 2004 to 2005 is primarily due to increased 401(k) performance match contributions as a percentage of sales resulting from our increased profitability in 2005. In addition, there were increases as a percentage of sales in store remerchandising expense, which resulted from our continued investment in existing stores, and rent expense, as we continue to expand into metropolitan markets. These increases were partially offset by a decrease in vendor-provided store-service costs as a percentage of sales. Our ongoing evaluation of in-store vendor service expense has allowed us to appropriately adjust the level of vendor service in our stores, which led to the decrease as a percentage of sales. In addition, although there was an increase in advertising expense compared to 2004, we were able to enhance messaging and refine our marketing mix to make our advertising programs more productive, thereby resulting in the leverage of advertising expense as a percentage of sales in 2005.

Store opening costs - Store opening costs, which include payroll and supply costs incurred prior to store opening as well as grand opening advertising costs, are expensed as incurred and totaled $142 million in 2005 compared to $123 million in 2004. These costs are associated with the opening of 150 stores in 2005 (147 new and three relocated), as compared with the opening of 140 stores in 2004 (136 new and four relocated). Store opening costs for stores opened during the year averaged approximately $0.9 million per store in 2005 and 2004. Because store opening costs are expensed as incurred, the timing of expenses recognized may fluctuate based on the timing of store openings.

Depreciation - Depreciation leveraged eight basis points as a percentage of sales in 2005. At February 3, 2006, we owned 84% of our stores, compared to 81% at January 28, 2005, which includes stores on leased land. Property, less accumulated depreciation, increased to $16.4 billion at February 3, 2006, compared to $13.9 billion at January 28, 2005. The increase in property resulted primarily from our store expansion program and an additional investment in information technology.

Interest - Net interest expense is comprised of the following:

(In Millions)	2005			2004
Interest Expense, Net of Amount Capitalized	$	186		$	172
Amortization of Original Issue Discount and Loan Costs		17			20
Interest Income		(45	)		(16	)

Net Interest Expense	$	158		$	176

Interest expense has increased primarily due to the October 2005 $1 billion debt issuance, partially offset by lower interest expense on convertible debt due to conversions during 2005. Interest expense relating to capital leases was $39 million for 2005 and $38 million for 2004. Interest income has increased primarily due to the investment of a portion of the proceeds from the October 2005 $1 billion debt issuance. For further discussion, see Financial Condition, Liquidity and Capital Resources.

Income tax provision - Our effective income tax rate was 38.5% in 2005 and 2004.

Fiscal 2004 Compared to Fiscal 2003

Net sales - The increase in sales in 2004 was attributable to our ongoing store expansion and relocation program and comparable store sales increases. We opened 140 stores in 2004, including four relocations, adding our first stores in Minnesota, Wisconsin and Maine.

The comparable store sales increase of 6.6% in 2004 reflected improved sales in every merchandising category. The categories that performed above our average comparable store sales increase for the year included millwork, rough plumbing, lumber, building materials, rough electrical, hardware, outdoor power equipment, seasonal living and cabinets & countertops. Inflation in lumber and building material prices during the year favorably impacted comparable store sales by approximately 150 basis points.

We experienced comparable store sales increases in every product category and all geographic regions due in part to the implementation of our merchandising and operations strategies.

Our specialty sales initiatives, which include Installed Sales, SOS and Commercial Business Customer sales, also contributed to the comparable store sales increase in 2004. We completed the rollout of the new Installed Sales model to all of our stores during 2004. With the opportunity to expand into new categories of installation, we believe Installed Sales will continue to provide an area of future sales growth. We also experienced positive results from our SOS initiatives, with total SOS sales increasing approximately 27% in 2004. Our Commercial Business Customer initiative also performed well in 2004, with comparable store sales increases of over twice the company average and double-digit comparable store sales increases in 15 of 18 merchandising categories. Our relationship with the Commercial Business Customer grew across the store, not just in lumber and building materials.

Average ticket increased $4.22 or 7.1% from $59.21 in 2003 to $63.43 in 2004, due in part to the success of the “Up the Continuum” initiative as well as Lowe’s credit programs. Average ticket for comparable stores increased 6.3%.

Gross margin - The increase in gross margin as a percentage of sales was attributable primarily to the implementation of EITF 02-16. The implementation of EITF 02-16, which resulted in the reclassification of vendor reimbursements for cooperative advertising and third-party in-store service costs from SG&A expense to a reduction of cost of sales when the associated inventory is sold, favorably impacted gross margin as a percentage of sales by 258 basis points for 2004. Excluding the impact of the implementation of EITF 02-16 as it related to cooperative advertising and in-store services, gross margin as a percentage of sales was relatively flat compared to 2003. This was due in part to unfavorable product mix shifts and increased distribution costs. The increased distribution costs were associated with the R3 initiative, which includes adding safety stock to our distribution centers, reconfiguring racking and implementing new productivity standards. This strategy caused a temporary increase in our distribution costs, but with longer-term positive implications for our in-stock position, inventory productivity and SG&A leverage. Increased fuel prices also contributed to the increase in distribution costs.

SG&A - The increase in SG&A expenses as a percentage of sales from 2003 to 2004 was due primarily to the implementation of EITF 02-16, as previously discussed. This unfavorably impacted SG&A as a percentage of sales by 316 basis points for 2004. This was partially offset by leverage in gross advertising and salaries as a percentage of sales, as well as improvements in the performance of the credit portfolio held by General Electric.

Store opening costs - Store opening costs totaled $123 million in 2004 compared to $128 million in 2003. These costs were associated with the opening of 140 stores in 2004 (136 new and four relocated), as compared with the opening of 130 stores in 2003 (125 new and five relocated). Because store opening costs are expensed as incurred, the timing of expenses recognized may fluctuate based on the timing of store openings. Store opening costs for stores opened during the year averaged approximately $0.9 million per store in 2004 versus approximately $1 million per store in 2003.

Depreciation - Depreciation leveraged five basis points as a percentage of sales in 2004. Approximately 97% of new stores opened in the last three years have been owned, which included stores on leased land. Property, less accumulated depreciation, increased to $13.9 billion at January 28, 2005, compared to $11.8 billion at January 30, 2004. The increase in property resulted primarily from our store expansion program and an additional $300 million investment in information technology.

Interest - Interest expense decreased from 2003 due to lower debt levels resulting from scheduled debt repayments. Interest expense relating to capital leases was $38 million for 2004 and $39 million for 2003. For further discussion, see Financial Condition, Liquidity and Capital Resources.

Income tax provision - Our effective income tax rates were 38.5% and 37.9% in 2004 and 2003, respectively. The higher rate in 2004 was primarily the result of expansion into states with higher state income tax rates.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The R3 initiative enables us to move safety stock out of our stores and into our RDC network. During 2004, safety stock was added to the distribution network prior to reducing the safety stock in the stores in order to maintain service levels. This resulted in inventory growth in 2004 that outpaced sales growth. However, in 2005, we started reducing safety stock in our stores and began to realize the benefits of the R3 initiative in the form of inventory leverage and inventory turn improvements. As a result, sales in 2005 increased 19% including the effect of the fifty-third week, while inventory growth was 13%. We expect additional inventory improvements as a result of the R3 initiative in 2006.

Cash Flows

The following table summarizes the components of the consolidated statements of cash flows, as well as the percentage change in cash from the prior year. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements:

										Percentage Increase / (Decrease) in Cash from Prior Year
(In Millions)	2005			2004			2003			2005 vs. 2004			2004 vs. 2003
Net cash provided by operating activities	$	3,842		$	3,073		$	3,034			25	%		1	%
Net cash used in investing activities		(3,674	)		(2,362	)		(2,487	)		(56	)		5
Net cash used in financing activities		(275	)		(1,047	)		(17	)		74			NM
Net (decrease) increase in cash and cash equivalents		(107	)		(336	)		530			68			(163	)
Cash and cash equivalents, beginning of year		530			866			336			(39	)		158
Cash and cash equivalents, end of year	$	423		$	530		$	866			(20	%)		(39	%)

NM: Not meaningful

Cash flows from operating activities provide a significant source of our liquidity. The increase in cash provided by operating activities during 2005 resulted primarily from increased net earnings as well as a lower investment in inventory compared to 2004. The increase in cash provided by operating activities during 2004 resulted primarily from increased net earnings, offset by our investment in inventory as a part of the R3 initiative. Working capital at February 3, 2006, was $2.0 billion compared to $1.2 billion at January 28, 2005. The increase in working capital was due primarily to our October 2005 $1 billion debt issuance and increased net earnings, offset by the $600 million repayment of notes that matured in December 2005.

The primary component of net cash used in investing activities continues to be new store and distribution facilities and the infrastructure and technology needed to support this growth. Cash acquisitions of fixed assets were $3.4 billion for 2005, $2.9 billion in 2004 and $2.3 billion in 2003. The February 3, 2006, retail selling space of 140 million square feet represented a 13% increase over January 28, 2005. The January 28, 2005, retail selling space of 124 million square feet represented a 14% increase over January 30, 2004.

Cash flows used in financing activities decreased significantly in 2005 compared to 2004, primarily as a result of proceeds from the October 2005 issuance of $1 billion in senior notes and fewer repurchases of common stock under our share repurchase program, offset by greater scheduled debt repayments. Financing uses of cash in 2004 were primarily the result of our share repurchase program. Financing uses of cash in 2003 primarily consisted of cash dividend payments, repayment of short-term borrowings and scheduled debt repayments. These uses were partially offset by proceeds generated from stock option exercises and cash proceeds from the employee stock purchase plan. The ratio of debt to equity plus debt was 19.8%, 24.3%, and 26.9% as of the years ended 2005, 2004 and 2003, respectively.

Sources of Liquidity

In addition to our cash flows from operations, we have a $1 billion senior credit facility that expires in July 2009 that also provides a source of liquidity. The facility is available to support our $1 billion commercial paper program and for direct borrowings. Borrowings made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants, which include maintenance of a specific financial ratio. We were in compliance with those covenants at February 3, 2006 and January 28, 2005. Fifteen banking institutions are participating in the $1 billion senior credit facility. As of February 3, 2006 and January 28, 2005, there were no outstanding borrowings under the facility or under our commercial paper program.

Four banks have extended lines of credit aggregating $420 million for the purpose of issuing documentary letters of credit and standby letters of credit. These lines do not have termination dates and are reviewed periodically. Commitment fees ranging from .25% to .50% per annum are paid on the letters of credit amounts outstanding. Outstanding letters of credit totaled $316 million as of February 3, 2006, and $304 million as of January 28, 2005.

Cash Requirements

In January 2005, the Board of Directors authorized up to $1 billion in share repurchases through 2006. This program is intended to be implemented through purchases made from time to time either in the open market or through private transactions. Shares purchased under the share repurchase program are retired and returned to authorized and unissued status. During 2005, we repurchased 25.0 million shares at a total cost of $774 million. In January 2006, the Board of Directors authorized up to an additional $1 billion in share repurchases through 2007. As of February 3, 2006, the total remaining authorization was $1.2 billion.

Our quarterly cash dividend per share was increased in 2004 to $0.02 and again in 2005 to $0.03. This increased cash paid for dividends in 2005 as compared to 2004.

Our 2006 capital budget is $4.2 billion, inclusive of approximately $387 million of leases. Approximately 79% of this planned commitment is for store expansion and new distribution centers. Expansion plans for 2006 consist of 155 stores, including five relocations of older stores. This planned expansion is expected to increase sales floor square footage by approximately 12%. Approximately 63% of the 2006 projects will be owned and 37% will be ground-leased properties.

At February 3, 2006, we owned and operated 11 regional distribution centers. We expect to open additional RDCs in Rockford, Illinois and Lebanon, Oregon in 2007. In addition, we plan to expand three existing distribution centers in Valdosta, Georgia, Statesville, North Carolina and North Vernon, Indiana by spring 2006. We also owned and operated 10 flatbed distribution centers and leased and operated two flatbed distribution centers for the handling of lumber, building materials and other long-length items. We expect to open four additional flatbed distribution centers in 2006.

We believe that net cash provided by operating activities and financing activities will be adequate for our expansion plans and other operating requirements over the next 12 months. However, the availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating downgrade or a deterioration of certain financial ratios. There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price.

Holders of the Senior Convertible Notes may convert their notes into 34.424 shares of the company’s common stock only if: the sale price of the company’s common stock reaches specified thresholds, or the credit rating of the notes is below a specified level, or the notes are called for redemption, or specified corporate transactions representing a change in control have occurred. There is no indication that we will not be able to maintain the minimum investment grade rating. During the fourth quarter of 2005, our closing share prices reached the specified threshold such that the Senior Convertible Notes would become convertible at the option of each holder into shares of common stock in the first quarter of 2006. Therefore, through May 5, 2006, holders may elect to convert each such note into 34.424 shares of common stock. In addition, if a change in control of the company occurs on or before October 2006, each holder of the Senior Convertible Notes may require us to purchase for cash all or a portion of such holder’s notes. We may redeem for cash all or a portion of the notes at any time beginning October 2006, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the redemption date.

Our debt ratings at February 3, 2006, were as follows:

Current Debt Ratings	S&P	Moody’s	Fitch
Commercial Paper	A1	P1	F1+
Senior Debt	A+	A2	A+
Outlook	Stable	Positive	Stable

OFF-BALANCE SHEET ARRANGEMENTS

Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, change in financial condition, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes our significant contractual obligations and commercial commitments:

	Payments Due by Period
Contractual Obligations			Less than		1-3		4-5		After 5
(In Millions)	Total		1 year		years		years		years

Long-Term Debt (principal and interest amounts, excluding discount)	$	6,038	$	176	$	390	$	793	$	4,679

Capital Lease Obligations ¹		628		59		118		116		335

Operating Leases¹		4,918		279		561		556		3,522

Purchase Obligations ²		1,554		650		486		414		4

Subtotal - Contractual Obligations	$	13,138	$	1,164	$	1,555	$	1,879	$	8,540

	Amount of Commitment Expiration by Period
Commercial Commitments			Less than		1-3		4-5		After 5
(In Millions)	Total		1 year		years		years		years
Letters of Credit ³	$	316	$	315	$	1	$	-	$	-

Total Contractual Obligations and

Commercial Commitments

13,454

1,479

1,556

1,879

8,540

¹ Amounts do not include taxes, common area maintenance or insurance.

² Represents contracts for purchases of merchandise inventory, property and construction of buildings, as well as commitments related to certain marketing and information technology programs.

³ Letters of credit are issued for the purchase of import merchandise inventories, real estate and construction contracts, and insurance programs.

COMPANY OUTLOOK

Our 2005 fiscal year contained 53 weeks. Fiscal 2006 annual and fourth quarter comparisons will be negatively impacted by 52- versus 53-week and 13- versus 14-week comparisons, respectively. In addition, our 2006 quarterly comparisons will be impacted by a shift in comparable weeks to 2005. This week shift positively impacts first quarter and is offset by negative impacts in the second and fourth quarters. Our 2006 guidance contemplates these factors.

As of February 27, 2006, the date of our fourth quarter 2005 earnings release, we expected to open 155 stores during 2006, resulting in total square footage growth of approximately 12%. We expected total sales to increase 13-14% and comparable store sales to increase 5-6%. Operating margin, defined as gross margin less SG&A and depreciation, was expected to increase approximately 20 basis points. In addition, store opening costs were expected to be approximately $130 million. Diluted earnings per share of $2.02 to $2.07 were expected for the fiscal year ending February 2, 2007.

FORWARD-LOOKING STATEMENTS

We speak throughout this Annual Report about our future, particularly in the “Letter to Shareholders” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” While we believe our estimates and expectations are reasonable, they are not guarantees of future performance. Our actual results could differ substantially from our expectations because, for example:

Our sales are dependent upon the health and stability of the general economy. We monitor key economic indicators including personal income, employment growth, housing turnover, and home ownership levels. In addition, changes in the level of repairs, remodeling and additions to existing homes, changes in commercial building activity, and the availability and cost of financing can impact our business.

·	Major weather-related events and unseasonable weather, particularly wet and cold weather during the spring and early summer months, may impact sales of seasonal merchandise and products designed for outdoor use on a short-term basis.

·	Our expansion strategy may be impacted by environmental regulations, local zoning issues, availability and development of land, and more stringent land use regulations. Furthermore, our ability to secure a highly-qualified workforce is an important element to the success of our expansion strategy.

·	Our business is highly competitive, and as we build an increasing percentage of our new stores in larger markets and utilize new sales channels such as the Internet, we may face new and additional forms of competition.

The ability to continue our everyday low pricing strategy and provide the products that customers want depends on our vendors providing a reliable supply of products at competitive prices and our ability to effectively manage our inventory. As an increasing number of the products we sell are imported, any restrictions or limitations on importation of such products, political or financial instability in some of the countries from which we import them, or a failure to comply with laws and regulation of those countries from which we import them, could interrupt our supply of imported inventory.

·	Our goal of increasing our market share and our commitment to keeping our prices low require us to make substantial investments in new technology and processes whose benefits could take longer than expected to be realized and which can be difficult to implement and integrate.

For more information about these and other risks and uncertainties that we are exposed to, you should read the “Risk Factors” included in our Annual Report on Form 10-K to the United States Securities and Exchange Commission. All forward-looking statements in this report speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section and in the “Risk Factors” included in our Annual Report on Form 10-K. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

Item 8 - Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.

Mooresville, North Carolina

We have audited the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of February 3, 2006 and January 28, 2005, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended February 3, 2006. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the Company at February 3, 2006 and January 28, 2005, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 3, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of February 3, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 6, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

April 6, 2006 (September 29, 2006 as to Note 2 and the last paragraph of Note 1)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lowe’s Companies, Inc.

Mooresville, North Carolina

We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Lowe’s Companies, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of February 3, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of February 3, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the fiscal year ended February 3, 2006 of the Company and our report dated April 6, 2006 (September 29, 2006 as to Note 2 and the last paragraph of Note 1) expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

April 6, 2006

Lowe's Companies, Inc.
Consolidated Statements of Earnings
In Millions, Except Per Share and Percentage Data

	February 3,					January 28,					January 30,
	2006					2005					2004
	As Restated		%			As Restated		%			As Restated		%
Years Ended On	(Note 2)		Sales			(Note 2)		Sales			(Note 2)		Sales

Net sales (Note 1)	$	43,243		100.00	%	$	36,464		100.00	%	$	30,838		100.00	%

Cost of sales (Notes 1 and 2)		28,453		65.80			24,224		66.44			21,305		69.08

Gross margin		14,790		34.20			12,240		33.56			9,533		30.92

Expenses:

Selling, general and administrative (Notes 1 and 6)		9,014		20.84			7,562		20.74			5,578		18.09

Store opening costs (Note 1)		142		0.33			123		0.34			128		0.42

Depreciation (Notes 1 and 5)		980		2.27			859		2.35			739		2.40

Interest (Note 16)		158		0.37			176		0.48			180		0.58

Total expenses		10,294		23.81			8,720		23.91			6,625		21.49

Pre-tax earnings		4,496		10.39			3,520		9.65			2,908		9.43

Income tax provision (Notes 2 and 14)		1,731		4.00			1,353		3.71			1,101		3.57

Earnings from continuing operations		2,765		6.39			2,167		5.94			1,807		5.86

Earnings from discontinued operations, net of tax (Note 3)		-		-			-		-			15		0.05

Net earnings	$	2,765		6.39	%	$	2,167		5.94	%	$	1,822		5.91	%


Basic earnings per share (Note 10)
Continuing operations	$	1.78				$	1.39				$	1.15
Discontinued operations		-					-					0.01
Basic earnings per share	$	1.78				$	1.39				$	1.16

Diluted earnings per share (Note 10)
Continuing operations	$	1.73				$	1.35				$	1.12
Discontinued operations		-					-					0.01
Diluted earnings per share	$	1.73				$	1.35				$	1.13

Cash dividends per share	$	0.11				$	0.08				$	0.06

See accompanying notes to the consolidated financial statements.

Lowe's Companies, Inc.
Consolidated Balance Sheets
In Millions, Except Par Value and Percentage Data


	February 3,					January 28,
	2006					2005
	As Restated		%			As Restated		%
	(Note 2)		Total			(Note 2)		Total
Assets

Current assets:
Cash and cash equivalents (Note 1)	$	423		1.7	%	$	530		2.5	%
Short-term investments (Notes 1 and 4)		453		1.8			283		1.3
Accounts receivable - net (Note 1)		18		0.1			9		-
Merchandise inventory - net (Notes 1 and 2)		6,635		27.0			5,850		27.8
Deferred income taxes - net (Notes 2 and 14)		155		0.6			119		0.6
Other assets		104		0.4			75		0.4

Total current assets		7,788		31.6			6,866		32.6

Property, less accumulated depreciation (Notes 5 and 6)		16,354		66.4			13,911		65.9
Long-term investments (Notes 1 and 4)		294		1.2			146		0.7
Other assets (Note 6)		203		0.8			178		0.8

Total assets	$	24,639		100.0	%	$	21,101		100.0	%

Liabilities and Shareholders' Equity

Current liabilities:
Current maturities of long-term debt (Note 8)	$	32		0.1	%	$	630		3.0	%
Accounts payable		2,832		11.6			2,695		12.8
Accrued salaries and wages		424		1.7			386		1.8
Self-insurance liabilities (Note 1)		571		2.3			467		2.2
Deferred revenue (Note 1)		709		2.9			539		2.6
Other current liabilities (Notes 1 and 6)		1,264		5.1			931		4.4

Total current liabilities		5,832		23.7			5,648		26.8

Long-term debt, excluding current maturities (Notes 8, 9 and 12)		3,499		14.2			3,060		14.5
Deferred income taxes (Note 14)		735		3.0			736		3.5
Other long-term liabilities (Note 1)		277		1.1			159		0.7

Total liabilities		10,343		42.0			9,603		45.5

Shareholders' equity (Note 11):
Preferred stock - $5 par value, none issued		-		-			-		-
Common stock - $.50 par value;
Shares Issued and Outstanding
February 3, 2006 1,568
January 28, 2005 1,548		784		3.2			774		3.7
Capital in excess of par value		1,320		5.3			1,127		5.3
Retained earnings (Note 2)		12,191		49.5			9,597		45.5
Accumulated other comprehensive income		1		-			-		-

Total shareholders' equity		14,296		58.0			11,498		54.5

Total liabilities and shareholders' equity