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; the impact of public health issues, such as the recent global pandemic
of a novel strain of the coronavirus ("COVID-19"); 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 in Item 1A under Part 2 of this Quarterly Report on
Form 10-Q, 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 theAmericas . We began operations in 1979 and atMay 9, 2020 , operated 5,836 stores in theU.S. , 610 stores inMexico and 38 stores inBrazil . 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. AtMay 9, 2020 , in 4,950 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 inMexico andBrazil . 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. 22 Table of Contents
Operating results for the twelve and thirty-six weeks endedMay 9, 2020 are not necessarily indicative of the results that may be expected for the fiscal year endingAugust 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.
COVID-19 Impact
The outbreak of a novel strain of the coronavirus ("COVID-19"), which was
declared a global pandemic on March 11, 2020 by the World Health Organization ,
has led to adverse impacts on the national and global economy. We have been able
to keep our stores open and operating in the U.S. Initially, we reduced the
hours of operation in most of our stores, but subsequently have returned to more
normal operating hours. We have also taken numerous measures to ensure the
health, safety and well-being of our customers and employees. We provided new
Emergency Time-Off benefit enhancements for both full-time and part-time
eligible hourly employees in the U.S. and Puerto Rico . We invested in supplies
for the protection of our employees and customers, increased the frequency of
cleaning and disinfecting, and introduced new service options for customers,
such as curbside pickup, among other things. These expanded benefits, supply
costs and other COVID-19 related costs resulted in approximately $75 million of
expense included in Operating, selling, general and administrative expenses in
the Condensed Consolidated Statements of Income for the twelve weeks ended and
thirty-six weeks ended May 9, 2020 .
In
While sales were initially negatively impacted, they have since increased. However, 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 intended to minimize the spread of the pandemic or to stimulate the economy and other unintended consequences. Accordingly, continued business disruption relating to the COVID-19 outbreak may cause significant fluctuations in our business, 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 theU.S. at favorable prices, all of which would adversely impact our business and results of operations.
Executive Summary
Net sales decreased 0.1% for the quarter driven by the impact of the COVID-19 crisis which led to a decrease in domestic same store sales (sales from stores open at least one year) of 1.0%. Domestic commercial sales decreased 6.7%, which represents 20.6% of our total sales. Operating profit decreased 10.2% to$491.7 million compared to$547.5 million in the same period last year, while net income for the quarter decreased 15.5% over the same period last year to$342.9 million compared to$405.9 million in the same period last year. Diluted earnings per share decreased 10.0% to$14.39 per share from$15.99 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. During the third quarter of fiscal 2020, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 83% 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. 23
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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, such as during the great recession. 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 and unemployment. The average age of theU.S. light vehicle fleet continues to trend in our industry's favor. According to the latest data provided by theAuto Care Association as ofJanuary 1, 2019 , for the 8th consecutive year, the average age of vehicles on the road has exceeded 11 years. Since the beginning of the fiscal year and throughMarch 2019 (latest publicly available information), miles driven in theU.S. decreased 3.5%.
Twelve Weeks Ended
Compared with Twelve Weeks Ended
Net sales for the twelve weeks endedMay 9, 2020 decreased$3.7 million to$2.779 billion , or 0.1% over net sales of$2.783 billion for the comparable prior year period. Total auto parts sales decreased by 0.3%, primarily driven by a decrease in domestic same store sales of 1.0%, partially offset by net sales of$55.4 million from new stores. Domestic commercial sales decreased$41.0 million , or 6.7%, to$573.8 million over the comparable prior year period. Gross profit for the twelve weeks endedMay 9, 2020 was$1.491 billion , compared with$1.492 billion during the comparable prior year period. Gross profit, as a percentage of sales was flat to the comparable prior year period at 53.6%. Operating, selling, general and administrative expenses for the twelve weeks endedMay 9, 2020 were$999.0 million , or 35.9% of net sales, compared with$944.5 million , or 33.9% of net sales during the comparable prior year period. Operating expenses, as a percentage of sales, were higher than last year with the deleverage primarily driven by the unplanned approximate$75 million of costs incurred in response to COVID-19. Net interest expense for the twelve weeks endedMay 9, 2020 was$47.5 million compared with$43.2 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 due to the$500 million debt issuance of 3.625% Senior Notes dueApril 2025 and the$750 million debt issuance of 4.000% Senior Notes dueApril 2030 as well as an increase in borrowing rates. Average borrowings for the twelve weeks endedMay 9, 2020 were$5.460 billion , compared with$5.191 billion for the comparable prior year period. Weighted average borrowing rates were 3.4% for the twelve weeks endedMay 9, 2020 and 3.2% for the twelve weeks endedMay 4, 2019 . Our effective income tax rate was 22.8% of pretax income for the twelve weeks endedMay 9, 2020 , and 19.5% 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 twelve weeks endedMay 9, 2020 compared to the comparable prior year period. The benefit of stock options exercised for the twelve weeks endedMay 9, 2020 was$1.1 million compared to$13.1 million in the comparable prior year period. Net income for the twelve week period endedMay 9, 2020 decreased by$63.1 million to$342.9 million due to the factors set forth above, and diluted earnings per share decreased by 10.0% to$14.39 from$15.99 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$0.71 . 24 Table of Contents
Thirty-Six Weeks Ended
Compared with Thirty-Six Weeks Ended
Net sales for the thirty-six weeks endedMay 9, 2020 increased$210.7 million to$8.086 billion , or 2.7%, over net sales of$7.875 billion for the comparable prior year period. Total auto parts sales increased by 2.6%, primarily driven by net sales of$167.6 million from new stores and an increase in domestic same store sales of 0.5%. Domestic commercial sales increased$75.9 million , or 4.5%, to$1.752 billion over the comparable prior year period. Gross profit for the thirty-six weeks endedMay 9, 2020 was$4.358 billion , or 53.9% of net sales, compared with$4.235 billion , or 53.8% 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 thirty-six weeks endedMay 9, 2020 were$2.958 billion , or 36.6% of net sales, compared with$2.799 billion , or 35.5% of net sales. Deleverage was primarily driven by the unplanned approximate$75 million of costs incurred in response to COVID-19. Net interest expense for the thirty-six weeks endedMay 9, 2020 was$135.5 million compared with$123.6 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 due to the issuance of new Senior debt during the current quarter, as well as an increase in borrowing rates. Average borrowings for the thirty-six weeks endedMay 9, 2020 were$5.371 billion , compared with$5.094 billion for the comparable prior year period. Weighted average borrowing rates were 3.2% for the thirty-six week period endedMay 9, 2020 and 3.1% for the thirty-six week period endedMay 4, 2019 . Our effective income tax rate was 21.5% of pretax income for the thirty-six weeks endedMay 9, 2020 , and 19.8% 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 thirty-six weeks endedMay 9, 2020 compared to the comparable prior year period. The benefit of stock options exercised for the thirty-six week period endedMay 9, 2020 was$17.6 million compared to$38.2 million in the comparable prior year period. Net income for the thirty-six week period endedMay 9, 2020 decreased by$59.5 million to$992.5 million due to the factors set forth above, and diluted earnings per share increased by 0.4% to$41.08 from$40.92 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$1.45 .
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 thirty-six weeks endedMay 9, 2020 , our net cash flows from operating activities provided$1.303 billion as compared with$1.287 billion provided during the comparable prior year period. The increase is primarily due to favorable changes in accounts receivable. Our net cash flows used in investing activities for the thirty-six weeks endedMay 9, 2020 were$247.9 million as compared with$285.3 million in the comparable prior year period. Capital expenditures for the thirty-six weeks endedMay 9, 2020 were$273.9 million compared to$313.8 million for the comparable prior year period. The decrease is primarily driven by the timing of store openings in fiscal 2020 compared to the comparable prior year period. During the thirty-six week period endedMay 9, 2020 , we opened 73 net new stores. In the comparable prior year period, we opened 85 net new stores. Investing cash flows were impacted by our wholly owned captive, which purchased$82.5 million and sold$106.7 million in marketable debt securities during the thirty-six weeks endedMay 9, 2020 . During the comparable prior year period, the captive purchased$38.9 million in marketable debt securities and sold$61.1 million in marketable debt securities. 25
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Our net cash flows used in financing activities for the thirty-six weeks endedMay 9, 2020 were$712.2 million compared to$1.043 billion in the comparable prior year period. During the thirty-six weeks endedMay 9, 2020 , we received$500 million from the debt issuance of 3.625% Senior Notes dueApril 2025 and received$750 million from the debt issuance of 4.000% Senior Notes dueApril 2030 . During the comparable prior year period, we received$750 million from the issuance of debt and repaid our$250 million 1.625% Senior Notes dueApril 2019 using a portion of the$750 million Senior Notes issued inApril 2019 . For the thirty-six week period endedMay 9, 2020 , our commercial paper activity resulted in$1.030 billion net repayments from commercial paper, as compared to$348.5 million of net repayments from commercial paper in the comparable prior year period. Stock repurchases were$930.9 million in the current thirty-six week period as compared with$1.313 billion in the comparable prior year period. For the thirty-six weeks endedMay 9, 2020 , proceeds from the sale of common stock and exercises of stock options provided$56.3 million . In the comparable prior year period, proceeds from the sale of common stock and exercises of stock options provided$164.9 million . During fiscal 2020, we expect to decrease the investment in our business as compared to fiscal 2019 due to the impact of COVID-19. Our investments continue to be directed primarily to new stores, supply chain infrastructure, 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 theU.S. ,Mexico orBrazil , 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 108.2% atMay 9, 2020 , compared to 108.5% atMay 4, 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 endedMay 9, 2020 , our adjusted after-tax return on invested capital ("ROIC"), which is a non-GAAP number, was 34.0% as compared to 34.5% 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 ofNovember 18, 2017 (the "Extension Amendment") to the Third Amended and Restated Credit Agreement dated as ofNovember 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 fromNovember 18, 2021 untilNovember 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. OnApril 3, 2020 , we entered into a 364-Day Credit Agreement (the "364-Day Credit Agreement") to augment our access to liquidity due to current macroeconomic conditions and supplements our existing Revolving Credit Agreement. The 364-Day Credit Agreement provides for loans in the aggregate principal amount of up to$750 million . The 364-Day Credit Agreement will terminate, and all amounts borrowed under the 364-Day Credit Agreement will be due and payable, onApril 2, 2021 . Revolving loans under the 364-Day Credit Agreement may be base rate loans, Eurodollar loans, or a combination of both, at our election. As ofMay 9, 2020 , we had no outstanding borrowings under each of our revolving credit facilities and$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 ofMay 9, 2020 , we had$25.0 million in letters of credit outstanding under the letter of credit facility, which expires inJune 2022 .
In addition to the outstanding letters of credit issued under the committed
facilities discussed above, we had
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 ofMay 9, 2020 , we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements. As ofMay 9, 2020 , the$500 million 4.000% Senior Notes dueNovember 2020 and the$250 million 2.500% Senior Notes dueApril 2021 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 ofMay 9, 2020 , we had$2.747 billion of availability under our$2.750 billion revolving credit facilities which would allow us to replace these short-term obligations with long-term financing facilities. 27
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OnMarch 30, 2020 , we issued$500 million in 3.625% Senior Notes dueApril 2025 and$750 million in 4.000% Senior Notes dueApril 2030 under our automatic shelf registration statement on Form S-3, filed with theSEC onApril 4, 2019 (File No. 333-230719) (the "2019 Shelf Registration"). The 2019 Shelf Registration allows us to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. Proceeds from the debt issuance were used for general corporate purposes. Our adjusted debt to earnings before interest, taxes, depreciation, amortization, and rent ("EBITDAR") ratio was 2.6:1 as ofMay 9, 2020 and was 2.5:1 as ofMay 4, 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
FromJanuary 1, 1998 toMay 9, 2020 , we have repurchased a total of 147.7 million shares of our common stock at an aggregate cost of$22.354 billion , including 826,002 shares of our common stock at an aggregate cost of$930.9 million during the thirty-six week period endedMay 9, 2020 . OnOctober 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 ofMay 9, 2020 , we had$795.9 million remaining under the Board's authorization to repurchase our common stock. During the twelve week period endedMay 9, 2020 , we temporarily ceased share repurchases under our share repurchase program to conserve liquidity in response to the uncertainty related to COVID-19, and we will continue to evaluate current and expected business conditions and resume share repurchases under our share repurchase program when we deem appropriate.
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 atMay 9, 2020 , was$247.0 million , compared with$101.2 million atAugust 31, 2019 , and our total surety bonds commitment atMay 9, 2020 , was$41.5 million , compared with$36.7 million atAugust 31, 2019 .
Financial Commitments
Except for the previously discussed 364-Day Credit Agreement and debt issuances, as ofMay 9, 2020 , there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year endedAugust 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.
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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.
Reconciliation of Non-GAAP Financial Measure: Adjusted After-Tax ROIC
A B A-B=C D C+D
Fiscal Year Thirty-Six Seventeen Thirty-Six Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 31, May 4, August 31, May 9, May 9,
(in thousands, except
percentages) 2019(1) 2019 2019 2020 2020
Net income $ 1,617,221 $ 1,051,992 $ 565,229 $ 992,515 $ 1,557,744
Adjustments:
Interest expense 184,804 123,608 61,196 135,528 196,724
Rent expense(2) 332,726 224,259 108,467 227,327 335,794
Tax effect(3) (111,269) (74,791) (36,478) (78,014) (114,492)
Deferred tax liabilities, net
of repatriation tax (6,340) (6,340) - - -
Adjusted after-tax return $ 2,017,142 $ 1,318,728 $ 698,414 $ 1,277,356 $ 1,975,770
Average debt(4) $ 5,303,066
Average stockholders'
deficit(4) (1,684,662)
Add: Rent x 6 2,014,764
Average finance lease
liabilities(4) 184,286
Invested capital $ 5,817,454
Adjusted after-tax ROIC 34.0 %
A B A-B=C D C+D
Fiscal Year Thirty-Six Sixteen Thirty-Six Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 25, May 5, August 25, May 4, May 4,
(in thousands, except
percentages) 2018 2018 2018 2019 2019
Net income $ 1,337,536 $ 937,254 $ 400,282 $ 1,051,992 $ 1,452,274
Adjustments:
Impairment before tax impact 193,162 193,162 - - -
Pension termination charges
before tax impact 130,263 - 130,263 - 130,263
Interest expense 174,527 120,186 54,341 123,608 177,949
Rent expense 315,580 218,999 96,581 224,259 320,840
Tax effect(3) (188,885) (119,771) (69,114) (74,993) (144,107)
Deferred tax liabilities,
net of repatriation tax (132,113) (136,679) 4,566 (6,340) (1,774)
Adjusted after-tax return $ 1,830,070 $ 1,213,151 $ 616,919 $ 1,318,526 $ 1,935,445
Average debt(4) $ 5,075,956
Average stockholders'
deficit(4) (1,544,890)
Add: Rent x 6 1,925,040
Average finance lease
liabilities(4) 158,701
Invested capital $ 5,614,807
Adjusted after-tax ROIC 34.5 %
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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 Thirty-Six Seventeen Thirty-Six Trailing Four
Ended Weeks Ended WeeksEnded Weeks Ended Quarters Ended
August 31, May 4, August 31, May 9, May 9,
(in thousands, except ratio) 2019 2019 2019
2020 2020
Net income $ 1,617,221 $ 1,051,992 $ 565,229 $ 992,515 $ 1,557,744
Add: Interest expense 184,804 123,608 61,196 135,528 196,724
Income tax expense 414,112 259,762 154,350 271,591 425,941
Adjusted EBIT 2,216,137 1,435,362 780,775 1,399,634 2,180,409
Add: Depreciation expense 369,957 251,118 118,839 272,115 390,954
Rent expense(2) 332,726 224,259 108,467 227,327 335,794
Share-based expense 43,255 31,529 11,726 32,251 43,977
Adjusted EBITDAR $ 2,962,075 $ 1,942,268 $
1,019,807
Debt$ 5,418,272 Finance lease liabilities
184,276
Add: Rent x 6 2,014,764
Adjusted debt $ 7,617,312
Adjusted debt to EBITDAR 2.6
A B A-B=C D C+D
Fiscal Year Thirty-Six Sixteen Thirty-Six Trailing Four
Ended Weeks Ended WeeksEnded Weeks Ended Quarters Ended
August 25, May 5, August 25, May 4, May 4,
(in thousands, except ratio) 2018 2018 2018 2019 2019
Net income $ 1,337,536 $ 937,254 $ 400,282 $ 1,051,992 $ 1,452,274
Add: Impairment before tax
impact 193,162 193,162 - - -
Pension termination charges
before tax impact 130,263 - 130,263 - 130,263
Interest expense 174,527 120,186 54,341 123,608 177,949
Income tax expense 298,793 162,177 136,616 259,762 396,378
Adjusted EBIT 2,134,281 1,412,779 721,502 1,435,362 2,156,864
Add: Depreciation expense 345,084 237,091 107,993 251,118 359,111
Rent expense 315,580 218,999 96,581 224,259 320,840
Share-based expense 43,674 29,559 14,115 31,529 45,644
Adjusted EBITDAR $ 2,838,619 $ 1,898,428 $ 940,191 $ 1,942,268 $ 2,882,459
Debt $ 5,151,917
Finance lease liabilities 165,541
Add: Rent x 6 1,925,040
Adjusted debt $ 7,242,498
Adjusted debt to EBITDAR 2.5
(1) The fiscal year ended
Effective
842), the new lease accounting standard that required the Company to (2) 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 thirty-six weeks ended
Total lease cost per ASC 842, for the 36 weeks endedMay 9, 2020 $
286,626
Less: Finance lease interest and amortization
(42,172)
Less: Variable operating lease components, related to
insurance and common area maintenance for the 36 weeks
ended
(17,127)
Rent expense for the 36 weeks endedMay 9, 2020
227,327
Add: Rent expense for the 17 weeks ended
108,467
Rent expense for the 53 weeks endedMay 9, 2020 $
335,794
Effective tax rate over trailing four quarters ended
pension termination and 21.6% for interest and rent expense.
(4) All averages are computed based on trailing 5 quarter balances.
30
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 .
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