AUTOZONE, INC. In Management's Discussion and Analysis of Financial Condition and Results of
Operations ("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 27, 2022 and other filings wemake with theSEC . Forward-Looking Statements Certain statements contained herein 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, due to changes in fuel prices, miles driven or otherwise; energy prices; weather, including extreme temperatures, natural disasters and general weather conditions; 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; risks associated with self-insurance; war and the prospect of war, including terrorist activity; the impact of public health issues; inflation, including wage inflation; the ability to hire, train and retain qualified employees; construction delays; failure or interruption of our information technology systems; issues relating to the confidentiality, integrity or availability of information, including due to cyber-attacks; historic growth rate sustainability; downgrade of our credit ratings; damage to our reputation; challenges associated with international markets; origin and raw material costs of suppliers; inventory availability; disruption in our supply chain; impact of tariffs; impact of new accounting standards; our ability to execute our growth initiatives; and other 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 endedAugust 27, 2022 , and Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarterly period endedNovember 19, 2022 . 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. Events described above and in the "Risk Factors" could materially and adversely affect our business. However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward-looking statements. 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. Overview
We are the leading retailer and distributor of automotive replacement parts and accessories in theAmericas . We began operations in 1979 and atFebruary 11, 2023 , operated 6,226 stores in theU.S. , 707 stores inMexico and 81 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. AtFebruary 11, 2023 , in 5,500 of our domestic stores, we 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 the majority of our stores inMexico andBrazil . We sell the ALLDATA brand automotive diagnostic, repair and shop management software through www.alldata.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. Our websites and the information contained therein or linked thereto are not intended to be incorporated into this report. 17
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Operating results for the twelve and twenty-four weeks endedFebruary 11, 2023 are not necessarily indicative of the results that may be expected for the fiscal year endingAugust 26, 2023 . 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 quarters of fiscal 2023 and 2022 each have 16 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 increased 9.5% for the quarter endedFebruary 11, 2023 compared to the prior year period, which was driven by an increase in domestic same store sales (sales from stores open at least one year) of 5.3%. Domestic commercial sales increased 13.1%, which represents approximately 29.5% of our domestic auto parts sales. Operating profit increased 6.9% to$670.0 million compared to$626.8 million in the prior year period. Net income for the quarter increased 1.0% to$476.5 million compared to$471.8 million in the prior year period. Diluted earnings per share increased 10.5% to$24.64 per share from$22.30 per share in the prior year period. The above results include a$10.0 million non-cash LIFO charge incurred for the quarter endedFebruary 11, 2023 . Adjusting for the non-cash LIFO charge, adjusted operating profit increased 8.5%, adjusted net income increased 2.6% and adjusted diluted earnings per share increased 12.3% compared to the prior year period. Management believes these non-GAAP financial measures are useful in providing period-to-period comparisons of the results of our operations. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for a reconciliation of these non-GAAP measures to the most comparable GAAP measure. Our business is impacted by various factors within the economy that affect both our consumers and our industry, including but not limited to inflation, fuel costs, wage rates, supply chain disruptions, hiring 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 second quarter of fiscal 2023, failure and maintenance related categories represented the largest portion of our sales mix at approximately 86% of total sales, which is consistent with the comparable prior year period. Failure related categories continue 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 weather over a short-term period. Over the long-term, we believe the impact of weather on our sales mix is not significant. The two statistics we believe have the closest 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 close 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 macroeconomic factors and the number of seven year old or older vehicles on the road. The average age of theU.S. light vehicle fleet remains in our industry's favor as the average age has exceeded 11 years since 2012, according to the latest data provided by theAuto Care Association . As ofJanuary 1, 2022 , the average age of light vehicles on the road was 12.2 years. Since the beginning of the fiscal year and throughDecember 2022 (latest publicly available information), miles driven in theU.S. were down 2.6% compared to the same period in the prior year.
Twelve Weeks Ended
Compared with Twelve Weeks Ended
Net sales for the twelve weeks endedFebruary 11, 2023 increased$321.2 million to$3.7 billion , or 9.5% over net sales of$3.4 billion for the comparable prior year period. Total auto parts sales increased by 9.6%, primarily driven by an increase in domestic same store sales of 5.3% and net sales of$75.5 million from new stores. Domestic commercial sales increased$110.7 million to$954.6 million , or 13.1%, over the comparable prior year period. 18
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Gross profit for the twelve weeks endedFebruary 11, 2023 was$1.9 billion , compared with$1.8 billion during the comparable prior year period. Gross profit, as a percentage of sales, was 52.3% compared to 53.0% during the comparable prior year period. The decrease in gross margin was impacted by a 27 basis point ($10.0 million ) non-cash LIFO charge driven primarily by rising freight costs, with the remaining decrease resulting primarily from supply chain costs and accelerated growth in our commercial business. Operating, selling, general and administrative expenses for the twelve weeks endedFebruary 11, 2023 were$1.3 billion compared with$1.2 billion during the comparable prior year period. As a percentage of sales, these expenses were 34.1% compared with 34.4% during the comparable prior year period. Net interest expense for the twelve weeks endedFebruary 11, 2023 , was$65.6 million compared with$42.5 million during the comparable prior year period. Average borrowings for the twelve weeks endedFebruary 11, 2023 were$6.9 billion , compared with$5.6 billion for the comparable prior year period. Weighted average borrowing rates were 3.70% and 3.03% for the quarters endedFebruary 11, 2023 andFebruary 12, 2022 , respectively. Our effective income tax rate was 21.2% of pretax income for the twelve weeks endedFebruary 11, 2023 , and 19.3% for the comparable prior year period. The increase in the tax rate was primarily attributable to a decreased benefit from stock options exercised during the twelve weeks endedFebruary 11, 2023 . The benefit of stock options exercised for the twelve week period endedFebruary 11, 2023 was$13.4 million compared to$23.4 million in the comparable prior year period. Net income for the twelve weeks endedFebruary 11, 2023 increased by$4.8 million to$476.5 million due to the factors set forth above, and diluted earnings per share increased by 10.5% to$24.64 from$22.30 . Excluding the non-cash LIFO charge, adjusted net income increased 2.6% to$484.2 million , and adjusted diluted earnings per share increased 12.3% to$25.04 . 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$0.42 .
Twenty-Four Weeks Ended
Compared with Twenty-Four Weeks Ended
Net sales for the twenty-four weeks endedFebruary 11, 2023 increased$637.4 million to$7.7 billion , or 9.1% over net sales of$7.0 billion for the comparable prior year period. Total auto parts sales increased by 9.1%, primarily driven by an increase in domestic same store sales of 5.5% and net sales of$147.1 million from new stores. Domestic commercial sales increased$245.1 million to$2.0 billion , or 14.1%, over the comparable prior year period. Gross profit for the twenty-four weeks endedFebruary 11, 2023 was$3.9 billion , compared with$3.7 billion during the comparable prior year period. Gross profit, as a percentage of sales, was 51.1% compared to 52.7% during the comparable prior year period. The decrease in gross margin was driven by a 119 basis point ($91.0 million ) non-cash LIFO charge driven primarily by rising freight costs, with the remaining decrease resulting primarily from supply chain costs and accelerated growth in our commercial business.
Operating, selling, general and administrative expenses for the twenty-four
weeks ended
Net interest expense for the twenty-four weeks ended
Our effective income tax rate was 20.0% of pretax income for the twenty-four weeks endedFebruary 11, 2023 , and 20.7% for the comparable prior year period. The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during the twenty-four weeks endedFebruary 11, 2023 . The benefit of stock 19 Table of Contents
options exercised for the twenty-four weeks period ended
Net income for the twenty-four weeks endedFebruary 11, 2023 decreased by$11.1 million to$1.0 billion due to the factors set forth above, and diluted earnings per share increased by 8.5% to$52.12 from$48.03 . Excluding the non-cash LIFO charge, adjusted net income increased 5.7% to$1.1 billion , and adjusted diluted earnings per share increased 16.0% to$55.70 . The impact on current year to date diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of$1.12 .
Liquidity and Capital Resources
The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories. Our cash flow results benefitted from the quarter's strong sales and continued progress on our initiatives. We believe that our cash generated from operating activities and available credit, supplemented with our long-term borrowings will provide ample liquidity to fund our operations while allowing us to make strategic investments to support long-term growth initiatives and return excess cash to shareholders in the form of share repurchases. As ofFebruary 11, 2023 , we held$301.3 million of cash and cash equivalents, as well as$2.2 billion in undrawn capacity on our Revolving Credit Agreement, before giving effect to commercial paper borrowings. We believe our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due and fund our share repurchases over the short-term and long-term. In addition, we believe we have the ability to obtain alternative sources of financing, if necessary. However, decreased demand for our products or changes in customer buying patterns would negatively impact our ability to generate cash from operating activities. Decreased demand or changes in buying patterns could also impact our ability to meet the debt covenants of our credit agreements and, therefore, negatively impact the funds available under our Revolving Credit Agreement. In the event our liquidity is insufficient, we may be required to limit our spending.
For each of the twenty-four week periods ended
Our net cash flows used in investing activities for the twenty-four weeks endedFebruary 11, 2023 were$270.0 million as compared with$211.3 million in the comparable prior year period. Capital expenditures for the twenty-four weeks endedFebruary 11, 2023 were$259.2 million compared to$208.1 million in the comparable prior year period. The increase in capital expenditures was primarily driven by our growth initiatives, including hub and mega hub expansion projects, new distribution centers and new stores. During the twenty-four week period endedFebruary 11, 2023 andFebruary 12, 2022 , we opened 71 and 48 net new stores, respectively. Investing cash flows were impacted by our wholly owned captive, which purchased$14.0 million and sold$3.5 million in marketable debt securities during the twenty-four weeks endedFebruary 11, 2023 . During the comparable prior year period, the captive purchased$22.6 million in marketable debt securities and sold$13.9 million . Our net cash flows used in financing activities for the twenty-four weeks endedFebruary 11, 2023 were$844.7 million compared to$1.9 billion in the comparable prior year period. During the twenty-four weeks endedFebruary 11, 2023 , we received$1.0 billion in debt issuances and repaid our$300 million 2.875% senior notes dueJanuary 2023 . During the comparable prior year period, no debt was issued and we repaid our$500 million 3.700% Senior Notes dueApril 2022 . Stock repurchases were$1.8 billion in the current twenty-four week period as compared with$2.5 billion in the comparable prior year period. The treasury stock repurchases were primarily funded by cash flows from operations. For the twenty-four week period endedFebruary 11, 2023 , our commercial paper activity resulted in$227.6 million in net proceeds from commercial paper compared to$1.1 billion commercial paper net proceeds in the comparable prior year period. Proceeds from the sale of common stock and exercises of stock options for the twenty-four weeks endedFebruary 11, 2023 andFebruary 12, 2022 provided$72.8 million and$66.5 million , respectively. During fiscal 2023, we expect to increase the investment in our business as compared to fiscal 2022. Our investments are expected to be directed primarily to our supply chain initiatives, which includes expanded hub and mega hubs, as well as new distribution centers and new stores. The amount of investments in our new stores is impacted by different factors, 20
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including whether the building and land are purchased (requiring higher
investment) or leased (generally lower investment) and whether such buildings
are located in the
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 arrangements with financial institutions whereby they factor their AutoZone receivables, allowing them to receive early payment from the financial institution on our invoices at a discounted rate. The terms of these agreements are between the vendor and the financial institution. Upon request from the vendor, we confirm to the vendor's financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances. A downgrade in our credit or changes in the financial markets may limit the financial institutions' willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms. A reduction in payment terms would increase the working capital required to fund future inventory investments. 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 127.7% atFebruary 11, 2023 , compared to 126.8% atFebruary 12, 2022 . The increase from the comparable prior year period was primarily due to recent price inflation. 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 based on our current credit ratings and favorable experiences in the debt markets in the past. For the trailing four quarters endedFebruary 11, 2023 , our adjusted after-tax return on invested capital ("ROIC"), which is a non-GAAP measure, was 54.7% as compared to 49.4% for the comparable prior year period. Adjusted ROIC is calculated as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize operating leases). 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.
Debt Facilities
OnNovember 15, 2021 , we amended and restated our existing revolving credit facility (as amended from time to time, the "Revolving Credit Agreement") pursuant to which our borrowing capacity under the Revolving Credit Agreement was increased from$2.0 billion to$2.25 billion and the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from$2.25 billion to$3.25 billion . OnNovember 15, 2022 , we amended the Revolving Credit Agreement, extending the termination date by one year. As amended, the Revolving Credit Agreement will terminate, and all amounts borrowed will be due and payable, onNovember 15, 2027 , but we may make one additional request to extend the termination date for an additional period of one year. Revolving borrowings under the Revolving Credit Agreement may be base rate loans, Term SOFR loans, or a combination of both, at our election. The Revolving Credit Agreement includes (i) a$75 million sublimit for swingline loans, (ii) a$50 million individual issuer letter of credit sublimit and (iii) a$250 million aggregate sublimit for all letters of credit.
Under our Revolving Credit Agreement, 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.
As of
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
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be issued under the Revolving Credit Agreement. As of
In addition to the outstanding letters of credit issued under the committed
facilities discussed above, we had
As ofFebruary 11, 2023 , the$831.0 million commercial paper borrowings and the$500 million 3.125% Senior Notes dueJuly 2023 were classified as long-term in the Consolidated Balance Sheets, as we have the current ability and intent to refinance them on a long-term basis through available capacity in our Revolving Credit Agreement. As ofFebruary 11, 2023 , we had$2.2 billion of availability under our Revolving Credit Agreement, without giving effect to commercial paper borrowings, which would allow us to replace these short-term obligations with a long-term financing facility.
On
OnJanuary 27, 2023 , we issued$450 million in 4.500% Senior Notes dueFebruary 2028 and$550 million in 4.750% Senior Notes dueFebruary 2033 . Proceeds from the debt issuance were used to repay a portion of the outstanding commercial paper borrowings and for other general corporate purposes. The Senior Notes contain a provision that repayment may be accelerated if we experience both a change of control (as defined in the agreements) and a rating event (as defined in the agreements). The Company's borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens. All of the repayment obligations under its 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
Our adjusted debt to earnings before interest, taxes, depreciation,
amortization, rent and share-based compensation expense ("EBITDAR") ratio was
2.3:1 as of February 11, 2023 and was 2.0:1 as of February 12, 2022 . We
calculate adjusted debt as the sum of total debt, financing lease liabilities
and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes,
depreciation, amortization, rent, and share-based compensation expense 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. We expect the ratio of
adjusted debt to EBITDAR to return to pre-pandemic levels in the future,
increasing debt levels. Once the target ratio is achieved, to the extent
adjusted EBITDAR increases, we expect our debt levels to increase; conversely,
if adjusted EBITDAR decreases, 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 11, 2023 , we have repurchased a total of 153.3
million shares of our common stock at an aggregate cost of $31.9 billion ,
including 764.3 thousand shares of our common stock at an aggregate cost of $1.8
billion during the twenty-four week period ended February 11, 2023 .
On October 4, 2022 , the Board voted to authorize the repurchase of an additional
$2.5 billion of our common stock in connection with our ongoing share repurchase
program, which raised the total value of shares authorized to be repurchased to
$33.7 billion . Considering the cumulative repurchases as of February 11, 2023 ,
we had $1.8 billion remaining under the Board's authorization to repurchase our
common stock.
Subsequent to
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Off-Balance Sheet Arrangements
Since our fiscal year end, we have canceled, 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 atFebruary 11, 2023 , was$133.9 million , compared with$130.5 million atAugust 27, 2022 , and our total surety bonds commitment atFebruary 11, 2023 , was$45.9 million , compared with$46.0 million at August
27, 2022. Financial Commitments Except for the previously discussed Revolving Credit Agreement, the$550 million 4.750% Senior Notes dueFebruary 2023 and$450 million 4.500% Senior Notes dueFebruary 2028 debt issuances, and the$300 million 2.875% Senior Notes debt repayment, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year endedAugust 27, 2022 .
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, including Adjusted operating profit, Adjusted net income, Adjusted diluted earnings per share, Adjusted After-Tax ROIC and Adjusted Debt to EBITDAR. 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. Additionally, our management uses these non-GAAP financial measures to review and assess our underlying operating results and the Compensation Committee of the Board uses select measures to determine payments of performance-based compensation against pre-established targets. Adjusted operating profit, Adjusted net income and Adjusted diluted earnings per share present our financial results excluding the non-cash LIFO charges, which vary from period to period, and assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. Adjusted After-Tax ROIC and Adjusted Debt to EBITDAR 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.
We have included reconciliations of this information to the most comparable GAAP measures in the following reconciliation tables.
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Reconciliation of Non-GAAP Financial Measures: Adjusted operating profit, Adjusted net income and Adjusted diluted earnings per share
The following tables reconcile operating profit, net income, and diluted earnings per share to adjusted operating profit, adjusted net income and adjusted diluted earnings per share, which are presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the twelve and twenty-four week periods endedFebruary 11, 2023 andFebruary 12, 2022 . Twelve Weeks Ended Twenty-Four Weeks Ended February 11, February 12, February 11, February 12, (in thousands, except per share data) 2023 2022 2023 2022 Operating profit (GAAP)$ 669,977 $ 626,760 $ 1,393,010 $ 1,381,245 Cost of sales adjustment: Non-cash LIFO charge 10,000 - 91,000 - Adjusted operating profit (Non-GAAP)$ 679,977 $ 626,760 $
1,484,010
Net income (GAAP)$ 476,544 $ 471,755 $ 1,015,862 $ 1,026,990 Cost of sales adjustment: Non-cash LIFO charge 10,000 - 91,000 - Provision for income taxes on adjustment(1) (2,339) - (21,176) -
Adjusted net income (Non-GAAP)
1,085,686
Weighted average shares for basic earnings per share 18,705 20,513 18,856 20,750 Effect of dilutive stock equivalents 632 645 635 633 Weighted average shares for diluted earnings per share 19,337 21,158 19,491 21,383
Diluted earnings per share (GAAP)$ 24.64 $ 22.30 $ 52.12 $ 48.03 Non-cash LIFO charge, net of tax 0.40 -
3.58 -
Adjusted diluted earnings per
share (Non-GAAP) $ 25.04 $ 22.30 $ 55.70 $ 48.03 (1) The income tax impact of non-GAAP adjustments is calculated using the
estimated tax rate in effect for the respective non-GAAP adjustment.
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Reconciliation of Non-GAAP Financial Measure: Adjusted After-Tax ROIC
The following tables calculate the percentages of adjusted ROIC for the trailing
four quarters ended
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 27, February 12, August 27, February 11, February 11,
(in thousands, except
percentage) 2022 2022 2022 2023 2023
Net income $ 2,429,604 $ 1,026,990 $ 1,402,614 $ 1,015,862 $ 2,418,476
Adjustments:
Interest expense 191,638 85,755 105,883 123,332 229,215
Rent expense(1) 373,278 165,967 207,311 186,987 394,298
Tax effect(2) (117,503) (52,358)
(65,145) (64,546) (129,691)
Adjusted after-tax return
Average debt(3)$ 6,278,213 Average stockholders' deficit(3) (3,617,143) Add: Rent x 6(1) 2,365,788 Average finance lease liabilities(3) 294,337 Invested capital$ 5,321,195
Adjusted after-tax ROIC 54.7 %
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 28, February 13, August 28, February 12, February 12,
(in thousands, except
percentage) 2021 2021 2021 2022 2022
Net income $ 2,170,314 $ 788,379 $ 1,381,935 $ 1,026,990 $ 2,408,925
Adjustments:
Interest expense 195,337 92,191 103,146 85,755 188,901
Rent expense(1) 345,380 156,937 188,443 165,967 354,410
Tax effect(2) (112,469) (51,819)
(60,650) (52,358) (113,008)
Adjusted after-tax return
Average debt(3)$ 5,433,252 Average stockholders' deficit(3) (2,069,346) Add: Rent x 6(1) 2,126,460 Average finance lease liabilities(3) 255,497 Invested capital$ 5,745,863
Adjusted after-tax ROIC
49.4 %
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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 Twenty-Four Twenty-Eight Twenty-Four Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 27, February 12, August 27, February 11, February 11,
(in thousands, except ratio) 2022 2022 2022 2023 2023
Net income $ 2,429,604 $ 1,026,990 $ 1,402,614 $ 1,015,862 $ 2,418,476
Add: Interest expense 191,638 85,755 105,883 123,332 229,215
Income tax expense 649,487 268,500 380,987 253,816 634,803
EBIT 3,270,729 1,381,245 1,889,484 1,393,010 3,282,494
Add: Depreciation and
amortization expense 442,223 199,282 242,941 222,964 465,905
Rent expense(1) 373,278 165,967 207,311 186,987 394,298
Share-based expense 70,612 30,738 39,874 42,379 82,253
EBITDAR $ 4,156,842 $ 1,777,232 $
2,379,610
Debt$ 7,042,302 Financing lease liabilities
290,858
Add: Rent x 6(1) 2,365,788
Adjusted debt $ 9,698,948
Adjusted debt to EBITDAR 2.3
A B A-B=C D C+D
Fiscal Year Twenty-Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 28, February 13, August 28, February 12, February 12,
(in thousands, except ratio) 2021 2021 2021 2022 2022
Net income $ 2,170,314 $ 788,379 $ 1,381,935 $ 1,026,990 $ 2,408,925
Add: Interest expense 195,337 92,191 103,146 85,755 188,901
Income tax expense 578,876 216,422 362,454 268,500 630,954
EBIT 2,944,527 1,096,992 1,847,535 1,381,245 3,228,780
Add: Depreciation and
amortization expense 407,683 184,027 223,656 199,282 422,938
Rent expense(1) 345,380 156,937 188,443 165,967 354,410
Share-based expense 56,112 24,178 31,934 30,738 62,672
EBITDAR $ 3,753,702 $ 1,462,134 $
2,291,568
Debt$ 5,840,884 Financing lease liabilities
272,719
Add: Rent x 6(1) 2,126,460
Adjusted debt $ 8,240,063
Adjusted debt to EBITDAR 2.0
The table below outlines the calculation of rent expense and reconciles rent (1) expense to total lease cost, per ASC 842, the most directly comparable GAAP
financial measure, for the trailing four quarters ended February 11, 2023 and
February 12, 2022 .
Trailing Four Quarters Ended
(in thousands) February 11, 2023 February 12, 2022
Total lease cost, per ASC 842 $ 498,970 $ 442,950 Less: Finance lease interest and amortization (77,302) (62,607) Less: Variable operating lease components, related to insurance and common area maintenance (27,370) (25,933) Rent expense $ 394,298 $ 354,410
(2) Effective tax rate over trailing four quarters ended
(3) All averages are computed based on trailing five quarter balances.
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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
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 27, 2022 . There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year endedAugust 27, 2022 .
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