AUTOZONE, INC.
In Management's Discussion and Analysis ("MD&A"), we provide a historical and
prospective narrative of our general financial condition, results of operations,
liquidity and certain other factors that may affect the future results of
AutoZone, Inc. ("AutoZone" or the "Company"). The following MD&A discussion
should be read in conjunction with our Condensed Consolidated Financial
Statements, related notes to those statements and other financial information,
including forward-looking statements and risk factors, that appear elsewhere in
this Quarterly Report on Form
10-Q,
our Annual Report on Form
10-K
for the year ended August 31, 2019 and other filings with the SEC .
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form
10-Q
constitute forward-looking statements that are subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically use words such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expect," "estimate," "project,"
"positioned," "strategy", "seek", "may", "could" and similar expressions. These
are based on assumptions and assessments made by our management in light of
experience and perception of historical trends, current conditions, expected
future developments and other factors that we believe to be appropriate. These
forward-looking statements are subject to a number of risks and uncertainties,
including without limitation: product demand; energy prices; weather;
competition; credit market conditions; cash flows; access to available and
feasible financing; future stock repurchases; the impact of recessionary
conditions; consumer debt levels; changes in laws or regulations; war and the
prospect of war, including terrorist activity; inflation; the ability to hire,
train and retain qualified employees; construction delays; the compromising of
confidentiality, availability, or integrity of information, including cyber
attacks; historic growth rate sustainability; downgrade of our credit ratings;
damages to our reputation; challenges in international markets; failure or
interruption of our information technology systems; origin and raw material
costs of suppliers; disruption in our supply chain, due to public health
epidemics or otherwise; impact of tariffs; anticipated impact of new accounting
standards; and business interruptions. Certain of these risks and uncertainties
are discussed in more detail in the "Risk Factors" section contained in Item 1A
under Part 1 of our Annual Report on Form
10-K
for the year ended August 31, 2019 , and these Risk Factors should be read
carefully. Forward-looking statements are not guarantees of future performance
and actual results, developments and business decisions may differ from those
contemplated by such forward-looking statements, and events described above and
in the "Risk Factors" could materially and adversely affect our business.
Forward-looking statements speak only as of the date made. Except as required by
applicable law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results may materially differ from anticipated
results.
Overview
We are the leading retailer, and a leading distributor, of automotive
replacement parts and accessories in the Americas . We began operations in 1979
and at February 15, 2020 , operated 5,815 stores in the U.S. , 608 stores in
Mexico and 38 stores in Brazil . Each store carries an extensive product line for
cars, sport utility vehicles, vans and light trucks, including new and
remanufactured automotive hard parts, maintenance items, accessories and
non-automotive
products. At February 15, 2020 , in 4,942 of our domestic stores, we also had a
commercial sales program that provides commercial credit and prompt delivery of
parts and other products to local, regional and national repair garages,
dealers, service stations and public sector accounts. We also have commercial
programs in stores in Mexico and Brazil . We also sell the ALLDATA brand
automotive diagnostic and repair software through www.alldata.com and
www.alldatadiy.com. Additionally, we sell automotive hard parts, maintenance
items, accessories and
non-automotive
products through www.autozone.com and our commercial customers can make
purchases through www.autozonepro.com. We also provide product information on
our Duralast branded products through www.duralastparts.com. We do not derive
revenue from automotive repair or installation services.
Operating results for the twelve and twenty-four weeks ended February 15, 2020
are not necessarily indicative of the results that may be expected for the
fiscal year ending August 29, 2020 . Each of the first three quarters of our
fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17
weeks. The fourth quarter of fiscal 2020 has 16 weeks and fiscal 2019 had 17
weeks. Our business is somewhat seasonal in nature, with the highest sales
generally occurring during the months of February through September and the
lowest sales generally occurring in the months of December and January.
Executive Summary
Net sales were up 2.6% for the quarter driven by new stores, partially offset by
a decrease in domestic same store sales (sales from stores open at least one
year) of (0.8%). Domestic commercial sales increased 8.2%, which represents 22%
of our total sales. Operating profit increased 2.0% to $407.9 million , while net
income for the quarter increased 1.6% over the same period last year to
$299.3 million . Diluted earnings per share increased 7.8% to $12.39 per share
from $11.49 per share in the comparable prior year period.
Our business is impacted by various factors within the economy that affect both
our consumer and our industry, including but not limited to fuel costs, wage
rates and other economic conditions. Given the nature of these macroeconomic
factors, we cannot predict whether or for how long certain trends will continue,
nor can we predict to what degree these trends will impact us in the future.
Additionally, the current outbreak of a novel strain of the coronavirus
("COVID-19"), which originated in China and has spread globally, has led to
adverse impacts on the national and global economy. We have created contingency
plans for those merchandise categories believed to be at risk, including those
sourced from China and elsewhere, and continue to review and update our plans as
circumstances evolve. While we have not incurred significant disruptions thus
far from the COVID-19 outbreak, we are unable to accurately predict the impact
that COVID-19 will have due to numerous uncertainties, including the severity of
the disease, the duration of the outbreak, actions that may be taken by
governmental authorities and other unintended consequences. Accordingly,
continued business disruption relating to the COVID-19 outbreak may negatively
impact demand for our products, our store hours and our workforce availability
and may also magnify risks associated with sourcing quality merchandise
domestically and outside the U.S. at favorable prices, all of which would
adversely impact our business and results of operations.
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During the second quarter of fiscal 2020, failure and maintenance related
categories represented the largest portion of our sales mix, at approximately
85% of total sales with discretionary making up the remaining, which is
consistent with the comparable prior year period, with failure related
categories continuing to be the largest portion of our sales mix. We did not
experience any fundamental shifts in our category sales mix as compared to the
previous year. Our sales mix can be impacted by severe or unusual weather over a
short-term period. Over the long-term, we believe the impact of the weather on
our sales mix is not significant.
The two statistics we believe have the most positive correlation to our market
growth over the long-term are miles driven and the number of seven year old or
older vehicles on the road. While over the long-term we have seen a positive
correlation between our net sales and the number of miles driven, we have also
seen time frames of minimal correlation in sales performance and miles
driven. During the periods of minimal correlation between net sales and miles
driven, we believe net sales have been positively impacted by other factors,
including the number of seven year old or older vehicles on the road. The
average age of the U.S. light vehicle fleet continues to trend in our industry's
favor. According to the latest data provided by the Auto Care Association as of
January 1, 2019 , for the 8
th
consecutive year, the average age of vehicles on the road has exceeded 11 years.
Since the beginning of the fiscal year and through November 2019 (latest
publicly available information), miles driven in the U.S. have been essentially
flat.
Twelve Weeks Ended February 15, 2020
Compared with Twelve Weeks Ended February 9, 2019
Net sales for the twelve weeks ended February 15, 2020 increased $63.1 million
to $2.514 billion , or 2.6%, over net sales of $2.451 billion for the comparable
prior year period. Total auto parts sales increased by 2.6%, primarily driven by
net sales of $56.5 million from new stores, partially offset by a decrease in
domestic same store sales of (0.8%). Domestic commercial sales increased
$42.3 million , or 8.2%, to $556.9 million over the comparable prior year period.
Gross profit for the twelve weeks ended February 15, 2020 was $1.366 billion ,
compared with $1.325 billion during the comparable prior year period. Gross
profit, as a percentage of sales was 54.3% compared to 54.1% during the
comparable prior year period. The increase in gross margin was primarily driven
by supply chain leverage.
Operating, selling, general and administrative expenses for the twelve weeks
ended February 15, 2020 were $958.1 million , or 38.1% of net sales, compared
with $925.1 million , or 37.7% of net sales during the comparable prior year
period. Operating expenses, as a percentage of sales, were higher than last year
with deleverage primarily driven by domestic store payroll.
Net interest expense for the twelve weeks ended February 15, 2020 was
$44.3 million compared with $41.4 million during the comparable prior year
period. The increase was primarily due to an increase in average borrowing
levels over the comparable prior year period. Average borrowings for the twelve
weeks ended February 15, 2020 were $5.464 billion , compared with $5.119 billion
for the comparable prior year period. Weighted average borrowing rates were 3.0%
for the twelve weeks ended February 15, 2020 and 3.1% for the twelve weeks ended
February 9, 2019 .
Our effective income tax rate was 17.7% of pretax income for the twelve weeks
ended February 15, 2020 , and 17.8% for the comparable prior year period.
Net income for the twelve week period ended February 15, 2020 increased by
$4.6 million to $299.3 million due to the factors set forth above, and diluted
earnings per share increased by 7.8% to $12.39 from $11.49 in the comparable
prior year period. The impact on current quarter diluted earnings per share from
stock repurchases since the end of the comparable prior year period was an
increase of $0.55 .
Twenty-Four Weeks Ended February 15, 2020
Compared with Twenty-Four Weeks Ended February 9, 2019
Net sales for the twenty-four weeks ended February 15, 2020 increased
$214.4 million to $5.307 billion , or 4.2%, over net sales of $5.092 billion for
the comparable prior year period. Total auto parts sales increased by 4.2%,
primarily driven by net sales of $106.6 million from new stores and an increase
in domestic same store sales of 1.4%. Domestic commercial sales increased
$116.9 million , or 11.0%, to $1.178 billion over the comparable prior year
period.
Gross profit for the twenty-four weeks ended February 15, 2020 was
$2.867 billion , or 54.0% of net sales, compared with $2.743 billion , or 53.9% of
net sales, during the comparable prior year period. The increase in gross margin
was primarily driven by supply chain leverage.
Operating, selling, general and administrative expenses for the twenty-four
weeks ended February 15, 2020 were $1.959 billion , or 36.9% of net sales,
compared with $1.855 billion , or 36.4% of net sales. Deleverage was primarily
driven by domestic store payroll.
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Net interest expense for the twenty-four weeks ended February 15, 2020 was
$88.1 million compared with $80.4 million during the comparable prior year
period. The increase was primarily due to an increase in average borrowing
levels over the comparable prior year period. Average borrowings for the
twenty-four weeks ended February 15, 2020 were $5.327 billion , compared with
$5.045 billion for the comparable prior year period. Weighted average borrowing
rates were 3.1% for each of the twenty-four week periods ended February 15, 2020
and February 9, 2019 .
Our effective income tax rate was 20.8% of pretax income for the twenty-four
weeks ended February 15, 2020 , and 20.0% for the comparable prior year period.
The increase in the tax rate was primarily attributable to a reduced benefit
from stock options exercised during the twenty-four weeks ended February 15,
2020 compared to the comparable prior year period. The benefit of stock options
exercised for the twenty-four week period ended February 15, 2020 was
$16.5 million compared to $25.2 million in the comparable prior year period.
Net income for the twenty-four week period ended February 15, 2020 increased by
$3.6 million to $649.6 million due to the factors set forth above, and diluted
earnings per share increased by 6.9% to $26.70 from $24.97 in the comparable
prior year period. The impact on current quarter diluted earnings per share from
stock repurchases since the end of the comparable prior year period was an
increase of $1.09 .
Liquidity and Capital Resources
The primary source of our liquidity is our cash flows realized through the sale
of automotive parts, products and accessories. For the twenty-four weeks ended
February 15, 2020 , our net cash flows from operating activities provided
$651.6 million as compared with $817.1 million provided during the comparable
prior year period. The decrease is primarily due to unfavorable changes in
inventories, net of accounts payable.
Our net cash flows used in investing activities for the twenty-four weeks ended
February 15, 2020 were $174.9 million as compared with $176.2 million in the
comparable prior year period. Capital expenditures for the twenty-four weeks
ended February 15, 2020 were $190.6 million compared to $195.8 million for the
comparable prior year period. During the twenty-four week period ended
February 15, 2020 , we opened 50 net new stores. In the comparable prior year
period, we opened 39 net new stores. Investing cash flows were impacted by our
wholly owned captive, which purchased $56.3 million and sold $70.8 million in
marketable debt securities during the twenty-four weeks ended February 15, 2020 .
During the comparable prior year period, the captive purchased $21.1 million in
marketable debt securities and sold $34.5 million in marketable debt securities.
Our net cash flows used in financing activities for the twenty-four weeks ended
February 15, 2020 were $502.8 million compared to $661.5 million in the
comparable prior year period. For the twenty-four week period ended February 15,
2020 , our commercial paper activity resulted in $242.7 million in net proceeds
from commercial paper, as compared to $103.5 million of net proceeds from
commercial paper in the comparable prior year period. Stock repurchases were
$764.8 million in the current twenty-four week period as compared with
$847.1 million in the comparable prior year period. For the twenty-four weeks
ended February 15, 2020 , proceeds from the sale of common stock and exercises of
stock options provided $48.7 million . In the comparable prior year period,
proceeds from the sale of common stock and exercises of stock options provided
$107.6 million .
During fiscal 2020, we expect to increase the investment in our business as
compared to fiscal 2019. Our investments continue to be directed primarily to
new stores, supply chain infrastructure, investments in technology and
enhancements to existing stores. The amount of our investments in our new stores
is impacted by different factors, including such factors as whether the building
and land are purchased (requiring higher investment) or leased (generally lower
investment), located in the U.S. , Mexico or Brazil , or located in urban or rural
areas.
In addition to the building and land costs, our new stores require working
capital, predominantly for inventories. Historically, we have negotiated
extended payment terms from suppliers, reducing the working capital required and
resulting in a high accounts payable to inventory ratio. We plan to continue
leveraging our inventory purchases; however, our ability to do so may be limited
by our vendors' capacity to factor their receivables from us. Certain vendors
participate in financing arrangements with financial institutions whereby they
factor their receivables from us, allowing them to receive payment on our
invoices at a discounted rate. Extended payment terms from our vendors have
allowed us to continue our high accounts payable to inventory ratio. Accounts
payable, as a percentage of gross inventory, was 105.7% at February 15, 2020 ,
compared to 108.5% at February 9, 2019 .
Depending on the timing and magnitude of our future investments (either in the
form of leased or purchased properties or acquisitions), we anticipate that we
will rely primarily on internally generated funds and available borrowing
capacity to support a majority of our capital expenditures, working capital
requirements and stock repurchases. The balance may be funded through new
borrowings. We anticipate that we will be able to obtain such financing in view
of our current credit ratings and favorable experiences in the debt markets in
the past.
For the trailing four quarters ended February 15, 2020 , our adjusted
after-tax
return on invested capital ("ROIC") was 35.3% as compared to 33.5% for the
comparable prior year period. We use adjusted ROIC to evaluate whether we are
effectively using our capital resources and believe it is an important indicator
of our overall operating performance. Refer to the "Reconciliation of
Non-GAAP
Financial Measures" section for further details of our calculation.
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Debt Facilities
We entered into a Master Extension, New Commitment and Amendment Agreement dated
as of November 18, 2017 (the "Extension Amendment") to the Third Amended and
Restated Credit Agreement dated as of November 18, 2016 , as amended, modified,
extended or restated from time to time (the "Revolving Credit Agreement"). Under
the Extension Amendment: (i) our borrowing capacity under the Revolving Credit
Agreement was increased from $1.6 billion to $2.0 billion ; (ii) our option to
increase the borrowing capacity under the Revolving Credit Agreement was
"refreshed" and the amount of such option remained at $400 million ; (iii) the
maximum borrowing under the Revolving Credit Agreement may, at our option,
subject to lenders approval, be increased from $2.0 billion to $2.4 billion ;
(iv) the termination date of the Revolving Credit Agreement was extended from
November 18, 2021 until November 18, 2022 ; and (v) we have the option to make
one additional written request of the lenders to extend the termination date
then in effect for an additional year. Under the Revolving Credit Agreement, we
may borrow funds consisting of Eurodollar loans, base rate loans or a
combination of both. Interest accrues on Eurodollar loans at a defined
Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in
the Revolving Credit Agreement, depending upon our senior, unsecured,
(non-credit
enhanced) long-term debt ratings. Interest accrues on base rate loans as defined
in the Revolving Credit Agreement. As of February 15, 2020 , we had $3.2 million
of outstanding letters of credit under the Revolving Credit Agreement.
We also maintain a letter of credit facility that allows us to request the
participating bank to issue letters of credit on our behalf up to an aggregate
amount of $25 million . The letter of credit facility is in addition to the
letters of credit that may be issued under the Revolving Credit Agreement. As of
February 15, 2020 , we had $25.0 million in letters of credit outstanding under
the letter of credit facility, which expires in June 2022 .
In addition to the outstanding letters of credit issued under the committed
facilities discussed above, we had $219.4 million in letters of credit
outstanding as of February 15, 2020 . These letters of credit have various
maturity dates and were issued on an uncommitted basis.
All senior notes are subject to an interest rate adjustment if the debt ratings
assigned to the senior notes are downgraded (as defined in the agreements).
Further, the senior notes contain a provision that repayment of the senior notes
may be accelerated if we experience a change in control (as defined in the
agreements). Our borrowings under our senior notes contain minimal covenants,
primarily restrictions on liens. Under our revolving credit facilities,
covenants include restrictions on liens, a maximum debt to earnings ratio, a
minimum fixed charge coverage ratio and a change of control provision that may
require acceleration of the repayment obligations under certain circumstances.
All of the repayment obligations under our borrowing arrangements may be
accelerated and come due prior to the applicable scheduled payment date if
covenants are breached or an event of default occurs. As of February 15, 2020 ,
we were in compliance with all covenants and expect to remain in compliance with
all covenants under our borrowing arrangements.
As of February 15, 2020 , the $1.273 billion of commercial paper borrowings and
the $500 million 4.000% Senior Notes due November 2020 were classified as
long-term in the Consolidated Balance Sheets as we had the ability and intent to
refinance them on a long-term basis through available capacity in our revolving
credit facilities. As of February 15, 2020 , we had $1.997 billion of
availability under our $2.0 billion revolving credit facility, which would allow
us to replace these short-term obligations with long-term financing facilities.
Our adjusted debt to earnings before interest, taxes, depreciation,
amortization, and rent ("EBITDAR") ratio was 2.6:1 as of February 15, 2020 and
was 2.5:1 as of February 9, 2019 . We calculate adjusted debt as the sum of total
debt, finance lease liabilities and rent times six; and we calculate adjusted
EBITDAR by adding interest, taxes, depreciation, amortization, rent, share-based
expense and pension termination charges to net income. Adjusted debt to EBITDAR
is calculated on a trailing four quarter basis. We target our debt levels to a
ratio of adjusted debt to EBITDAR in order to maintain our investment grade
credit ratings. We believe this is important information for the management of
our debt levels. To the extent EBITDAR continues to grow in future years, we
expect our debt levels to increase; conversely, if EBITDAR declines, we would
expect our debt levels to decrease. Refer to the "Reconciliation of
Non-GAAP
Financial Measures" section for further details of our calculation.
Stock Repurchases
From January 1, 1998 to February 15, 2020 , we have repurchased a total of
147.5 million shares of our common stock at an aggregate cost of
$22.188 billion , including 669,967 shares of our common stock at an aggregate
cost of $764.8 million during the twenty-four week period ended February 15,
2020 . On October 7, 2019 , the Board voted to increase the authorization by
$1.25 billion . This raised the total value of shares authorized to be
repurchased to $23.15 billion . Considering cumulative repurchases as of
February 15, 2020 , we had $961.9 million remaining under the Board's
authorization to repurchase our common stock.
Subsequent to February 15, 2020 , we have repurchased 156,035 shares of our
common stock at an aggregate cost of $166.1 million .
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Off-Balance
Sheet Arrangements
Since our fiscal year end, we have cancelled, issued and modified
stand-by
letters of credit that are primarily renewed on an annual basis to cover
deductible payments to our casualty insurance carriers. Our total
stand-by
letters of credit commitment at February 15, 2020 , was $247.6 million , compared
with $101.2 million at August 31, 2019 , and our total surety bonds commitment at
February 15, 2020 , was $42.2 million , compared with $36.7 million at August 31,
2019 .
Financial Commitments
As of February 15, 2020 , there were no significant changes to our contractual
obligations as described in our Annual Report on Form
10-K
for the year ended August 31, 2019 .
Reconciliation of
Non-GAAP
Financial Measures
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain financial measures not derived in accordance with
GAAP. These
non-GAAP
financial measures provide additional information for determining our optimal
capital structure and are used to assist management in evaluating performance
and in making appropriate business decisions to maximize stockholders' value.
Non-GAAP
financial measures should not be used as a substitute for GAAP financial
measures, or considered in isolation, for the purpose of analyzing our operating
performance, financial position or cash flows. However, we have presented
non-GAAP
financial measures, as we believe they provide additional information that is
useful to investors. Furthermore, our management and the Compensation Committee
of the Board use the above mentioned
non-GAAP
financial measures to analyze and compare our underlying operating results and
to determine payments of performance-based compensation. We have included a
reconciliation of this information to the most comparable GAAP measures in the
following reconciliation tables.
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--------------------------------------------------------------------------------Table of Contents Reconciliation of Non-GAAP Financial Measure: Adjusted After-Tax ROIC The following tables calculate the percentages of adjusted ROIC for the trailing four quarters endedFebruary 15, 2020 andFebruary 9, 2019 . A B A-B=C D C+D Fiscal Year Ended Twenty-Four Twenty-Nine Twenty-Four Trailing Four August 31, Weeks Ended Weeks Ended Weeks Ended Quarters Ended 2019
(1) 2019 2019 2020 2020
Net income $ 1,617,221 $ 646,044 $ 971,177 $ 649,620 $ 1,620,797
Adjustments:
Interest expense 184,804 80,369 104,435 88,078 192,513
Rent expense 332,726 144,360 188,366 150,751 339,117
Tax effect
(2) (107,129 ) (46,519 ) (60,610 ) (49,438 ) (110,048 )
Deferred tax liabilities, net of repatriation tax (6,340 ) (6,340 ) - - -
Adjusted
after-tax
return $ 2,021,282 $ 817,914 $ 1,203,368 $ 839,011 $ 2,042,379
Average debt
(3) $ 5,241,651
Average stockholders' deficit
(3) (1,676,987 )
Add : Rent x 6
(4) 2,034,702
Average finance lease liabilities
(3) 178,416
Invested capital $ 5,777,782
Adjusted
after-tax
ROIC 35.3%
A B A-B=C D C+D
Fiscal Year Twenty-Four Twenty-Eight Twenty-Four Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 25,
2018 2018 2018 2019 2019
Net income $ 1,337,536 $
570,533
193,162 193,162 - - -
Pension termination charges before tax impact 130,263 - 130,263 - 130,263
Interest expense 174,527 78,229 96,298 80,369 176,667
Rent expense 315,580 142,712 172,868 144,360 317,228
Tax effect
(2) (211,806 ) (112,656 ) (99,150 ) (52,861 ) (152,011 )
Deferred tax liabilities, net of repatriation tax (132,113 ) (136,679 ) 4,566 (6,340 ) (1,774 )
Adjusted
after-tax
return $ 1,807,149 $ 735,301 $ 1,071,848 $ 811,572 $ 1,883,420
Average debt
(3) $ 5,054,281
Average stockholders' deficit
(3) (1,493,097 )
Add: Rent x 6 1,903,368
Average finance lease liabilities
(3) 156,840
Invested capital $ 5,621,392
Adjusted
after-tax
ROIC 33.5%
(1) The fiscal year ended
(2) Effective tax rate over trailing four quarters ended
20.7% . Effective tax rate over trailing four quarters ended
is 28.1% for pension termination and 23.5% for interest and rent expense.
(3) All averages are computed based on trailing 5 quarter balances.
(4) Effective
2016-02,
Leases (Topic 842), the new lease accounting standard that required the
Company to recognize operating lease assets and liabilities in the balance
sheet. The table below outlines the calculation of rent expense and
reconciles rent expense to total lease cost, per ASC 842, the most directly
comparable GAAP financial measure, for the twenty-four weeks ended
February 15, 2020 .
Total lease cost per ASC 842, for the 24 weeks ended
(28,195 )
Less: Variable operating lease components, related to insurance and
common area maintenance for the 24 weeks ended
(11,444 )
Rent expense for the 24 weeks endedFebruary 15, 2020
150,751
Add: Rent expense for the 29 weeks ended
188,366
Rent expense for the 53 weeks ended February 15, 2020$ 339,117 24
-------------------------------------------------------------------------------- Table of Contents Reconciliation of Non-GAAP Financial Measure: Adjusted Debt to EBITDAR
The following tables calculate the ratio of adjusted debt to EBITDAR for the
trailing four quarters ended
A B A-B=C D C+D
Fiscal Year Twenty-Four Twenty-Nine Twenty-Four Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 31, February 9,
2019 2019 2019 2020 2020
Net income $ 1,617,221 $ 646,044 $ 971,177 $ 649,620 $ 1,620,797
Add: Interest expense 184,804 80,369 104,435 88,078 192,513
Income tax expense 414,112 161,426 252,686 170,263 422,949
Adjusted EBIT 2,216,137 887,839 1,328,298 907,961 2,236,259
Add: Depreciation expense 369,957 166,230 203,727 180,420 384,147
Rent expense 332,726 144,360 188,366 150,751 339,117
Share-based expense 43,255 21,558 21,697 22,107 43,804
Adjusted EBITDAR $ 2,962,075 $ 1,219,987 $ 1,742,088 $ 1,261,239 $ 3,003,327
Debt $ 5,451,471
Finance lease liabilities 196,047
Add: Rent x 6
(1) 2,034,702
Adjusted debt $ 7,682,220
Adjusted debt to EBITDAR 2.6
A B A-B=C D C+D
Fiscal Year Twenty-Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 25 ,February 10 ,
2018 2018 2018 2019 2019
Net income $ 1,337,536 $ 570,533 $ 767,003 $ 646,044 $ 1,413,047
Add: Impairment before tax
impact 193,162 193,162 - - -
Pension termination charges
before tax impact 130,263 - 130,263 - 130,263
Interest expense 174,527 78,229 96,298 80,369 176,667
Income tax expense 298,793 25,090 273,703 161,426 435,129
Adjusted EBIT 2,134,281 867,014 1,267,267 887,839 2,155,106
Add: Depreciation expense 345,084 157,337 187,747 166,230 353,977
Rent expense 315,580 142,712 172,868 144,360 317,228
Share-based expense 43,674 23,764 19,910 21,558 41,468
Adjusted EBITDAR $ 2,838,619 $ 1,190,827 $ 1,647,792 $ 1,219,987 $ 2,867,779
Debt $ 5,111,201
Finance lease liabilities 154,923
Add: Rent x 6 1,903,368
Adjusted debt $ 7,169,492
Adjusted debt to EBITDAR 2.5
(1) Effective
2016-02,
Leases (Topic 842), the new lease accounting standard that required the
Company to recognize operating lease assets and liabilities in the balance
sheet. The table below outlines the calculation of rent expense and
reconciles rent expense to total lease cost, per ASC 842, the most directly
comparable GAAP financial measure, for the twenty-four weeks ended
February 15, 2020 .
Total lease cost per ASC 842, for the 24 weeks ended
190,390
Less: Finance lease interest and amortization
(28,195 )
Less: Variable operating lease components, related to insurance and
common area maintenance for the 24 weeks ended
(11,444 )
Rent expense for the 24 weeks endedFebruary 15, 2020
150,751
Add: Rent expense for the 29 weeks ended
188,366
Rent expense for the 53 weeks ended February 15, 2020$ 339,117 25
-------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements Refer to Note A of the Notes to Condensed Consolidated Financial Statements for the discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates Preparation of our consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent liabilities. Our policies are evaluated on an ongoing basis, and our significant judgments and estimates are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedAugust 31, 2019 . Our critical accounting policies have not changed since the filing of our Annual Report on Form 10-K for the year endedAugust 31, 2019 . Item 3. Quantitative and Qualitative Disclosures about Market Risk AtFebruary 15, 2020 , the only material change to our instruments and positions that are sensitive to market risk since the disclosures in our 2019 Annual Report to Stockholders was the$242.7 million net increase in commercial paper. The fair value of our debt was estimated at$5.678 billion as ofFebruary 15, 2020 and$5.419 billion as ofAugust 31, 2019 , based on the quoted market prices for the same or similar debt issues or on the current rates available to AutoZone for debt of the same terms. Such fair value was greater than the carrying value of debt by$226.6 million atFebruary 15, 2020 and greater than the carrying value by$212.7 million atAugust 31, 2019 . We had$1.273 billion of variable rate debt outstanding atFebruary 15, 2020 and$1.030 billion of variable rate debt outstanding atAugust 31, 2019 . At these borrowing levels for variable rate debt, a one percentage point increase in interest rates would have had an unfavorable annual impact on our pre-tax earnings and cash flows of$12.7 million in fiscal 2020. The primary interest rate exposure on variable rate debt is based on LIBOR. We had outstanding fixed rate debt of$4.179 billion , net of unamortized debt issuance costs of$21.2 million atFebruary 15, 2020 and$4.176 billion , net of unamortized debt issuance costs of$23.7 million atAugust 31, 2019 . A one percentage point increase in interest rates would reduce the fair value of our fixed rate debt by$175.9 million atFebruary 15, 2020 . Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As ofFebruary 15, 2020 , an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as ofFebruary 15, 2020 . Changes in Internal Controls There were no changes in our internal control over financial reporting that occurred during the quarter endedFebruary 15, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 26
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