Fitch Affirms Lowe's Senior Notes at 'A'; Revises Outlook to Positive.

NEW YORK -- Fitch Ratings has affirmed Lowe's Companies, Inc.'s (Lowe's) senior notes and debentures at 'A' and commercial paper at 'F1' and has revised the company's Rating Outlook to Positive from Stable. Approximately $3.7 billion of debt was outstanding as of April 30, 2004.

The affirmation reflects Lowe's strong, number two position in the home improvement retail market, solid operating performance, and conservative financial posture. These factors are weighed against the risks to the housing market associated with rising interest rates and the longer term potential for overbuilding in the sector. The Positive Outlook reflects Fitch's expectation for sustained operating strength together with improving credit protection measures.

Lowe's continues to produce solid operating results, with comparable store sales up 6.7% in 2003 and 9.9% in the first quarter of 2004. In addition, the company's operating margin expanded to 10.0% in the 12 months ended April 30, 2004 from 9.6% in 2002. Lowe's solid operating performance is supported by the strong housing market, a store format that has proven attractive to female shoppers, and a merchandising strategy that involves adding more upscale products to the mix.

Lowe's generated positive free cash flow in 2003 and is expected to remain free cash flow positive. This cash flow is projected to be channeled into a combination of debt repayment, share repurchases, and dividends. The company should have the ability to repay its next major debt maturity of $608 million in 2005, even as it repurchases its shares under a $1 billion authorization. As a result, Lowe's adjusted leverage, which declined to 1.3 times (x) in the 12 months ended April 30, 2004 from 1.6x in 2002, is projected to continue to drift lower over the next few years.

While rising interest rates pose some risk to the housing market, a gradual rise in interest rates won't necessarily have a significant negative effect on the housing market this year. However, longer term, the home improvement sector would begin to feel the effect of higher rates should home prices level off and the pace of housing turnover slow.

Another long-term concern is the risk of overbuilding in the sector, as both Lowe's and Home Depot are expanding their square footage at a rate well in excess of the projected industry growth rate of around 5%. Lowe's plans to add 140 stores this year, for a 14% increase in its square footage, and will likely maintain this pace of growth over the medium term. Longer term, it is expected that both Lowe's and Home Depot would adjust their growth plans should the productivity of their newer stores begin to erode.