Fitch Downgrades Lowe's S-T IDR to 'F1'; Affirms L-T IDR at 'A+'; Outlook Negative

CHICAGO -- Fitch Ratings has affirmed its ratings on Lowe's Companies, Inc. (Lowe's) as follows:

--Long-term Issuer Default Rating (IDR) 'A+';

--Bank credit facility 'A+';

--Senior notes and debentures 'A+'.

In addition, the short-term IDR and commercial paper (CP) ratings have both been downgraded to 'F1' from 'F1+'. Approximately $6.7 billion of debt is affected by these actions. The Rating Outlook is Negative.

The affirmation of the long-term IDR reflects Lowe's No.2 position in the home improvement retail market, weaker credit metrics that are acceptable within the current long-term rating category, and disciplined financial management. The downgrade of the short-term IDR and CP reflect Lowe's weaker positioning within the 'A+' rating level when compared to historical levels as well as Lowe's lower projected cash balance in the medium term and $1 billion of CP outstanding as of Feb. 1, 2008. The ratings also consider the company's average leverage target of 1.3 times (x) for the year after a combination of leveraged share repurchase activity and softer operating results in 2007, as well as store base growth. The Negative Outlook considers the possibility of continued weakness in the housing market in the medium term, which would further pressure Lowe's operating performance.

Lowe's reported soft 2007 operating results with a comparable store sales decline of 5.1% and sales growth of 2.9% due to the contribution of new store openings. The company's 2007 operating EBITDAR margin declined approximately 80 basis points to 13.5% as a result of the de-leveraging of SG&A expenses. This led to a 2.5% decrease in EBITDAR to $6.5 billion. Therefore, Lowe's credit metrics weakened with 2007 adjusted debt/EBITDAR and EBITDAR coverage of interest and rents of 1.5x and 9.7x, respectively, compared to 1x and 12.1x, respectively, in 2006. However, Lowe's credit measures are acceptable within the current rating, since they were strong for the rating level in the past. Fitch expects management to remain disciplined in its financial strategy as it manages around its average leverage target of 1.3x adjusted debt/EBITDAR. In addition, Fitch will monitor Lowe's operating performance as comparable store sales are expected to remain weak this year, which would further pressure credit measures.

In 2008, Lowe's plans to add 120 stores, which represents square footage growth of 8%. This remains a concern given the possibility of a protracted weakness in the housing market. Nevertheless, the company's market share is only 6.5% and it has demonstrated a successful track record of capturing market share away from its competitors. Also, Lowe's broad geographic presence in the U.S. as well as its overall competitive strength in the home improvement sector should help generate positive cash flow for its store expansion. Longer term, Fitch expects that the company would adjust its growth plans should the productivity of its newer stores begin to erode.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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