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MarketScreener Homepage  >  Equities  >  Nyse  >  AutoZone, Inc.    AZO

AUTOZONE, INC.

(AZO)
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Delayed Quote. Delayed Nyse - 09/29 04:10:00 pm
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AUTOZONE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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06/12/2020 | 05:21pm EDT
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 the Americas. We began operations in 1979
and at May 9, 2020, operated 5,836 stores in the U.S., 610 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 May 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 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.



                                       22

  Table of Contents
Operating results for the twelve and thirty-six weeks ended May 9, 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.

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 March 2020, we issued $1.250 billion in Senior Notes and closed on a new 364-day Senior unsecured revolving credit facility to strengthen our financial position and our ability to be responsive during this ever-changing environment.

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 the U.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

Table of Contents


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 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 8th
consecutive year, the average age of vehicles on the road has exceeded 11 years.
Since the beginning of the fiscal year and through March 2019 (latest publicly
available information), miles driven in the U.S. decreased 3.5%.

Twelve Weeks Ended May 9, 2020

Compared with Twelve Weeks Ended May 4, 2019

Net sales for the twelve weeks ended May 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 ended May 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
ended May 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 ended May 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 due April 2025 and the $750 million debt issuance of 4.000% Senior
Notes due April 2030 as well as an increase in borrowing rates. Average
borrowings for the twelve weeks ended May 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 ended May 9, 2020 and 3.2% for
the twelve weeks ended May 4, 2019.

Our effective income tax rate was 22.8% of pretax income for the twelve weeks
ended May 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 ended May 9, 2020 compared to the
comparable prior year period. The benefit of stock options exercised for the
twelve weeks ended May 9, 2020 was $1.1 million compared to $13.1 million in the
comparable prior year period.

Net income for the twelve week period ended May 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 May 9, 2020

Compared with Thirty-Six Weeks Ended May 4, 2019


Net sales for the thirty-six weeks ended May 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 ended May 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
ended May 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 ended May 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 ended May 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 ended May 9,
2020 and 3.1% for the thirty-six week period ended May 4, 2019.

Our effective income tax rate was 21.5% of pretax income for the thirty-six
weeks ended May 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 ended May 9, 2020 compared
to the comparable prior year period. The benefit of stock options exercised for
the thirty-six week period ended May 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 ended May 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 ended
May 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 ended
May 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
ended May 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 ended May 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 ended May 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

Table of Contents


Our net cash flows used in financing activities for the thirty-six weeks ended
May 9, 2020 were $712.2 million compared to $1.043 billion in the comparable
prior year period. During the thirty-six weeks ended May 9, 2020, we received
$500 million from the debt issuance of 3.625% Senior Notes due April 2025 and
received $750 million from the debt issuance of 4.000% Senior Notes due April
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 due April 2019
using a portion of the $750 million Senior Notes issued in April 2019. For the
thirty-six week period ended May 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 ended May 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 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 108.2% at May 9, 2020, compared
to 108.5% at May 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 ended May 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.

                                       26

  Table of Contents

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.

On April 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, on April 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 of May 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 of
May 9, 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 $218.8 million in letters of credit outstanding as of May 9, 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 May 9, 2020, we were
in compliance with all covenants and expect to remain in compliance with all
covenants under our borrowing arrangements.

As of May 9, 2020, the $500 million 4.000% Senior Notes due November 2020 and
the $250 million 2.500% Senior Notes due April 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 of May 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

Table of Contents

On March 30, 2020, we issued $500 million in 3.625% Senior Notes due April 2025
and $750 million in 4.000% Senior Notes due April 2030 under our automatic shelf
registration statement on Form S-3, filed with the SEC on April 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 of May 9, 2020 and was
2.5:1 as of May 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


From January 1, 1998 to May 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 ended May 9, 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 May 9, 2020, we had $795.9 million
remaining under the Board's authorization to repurchase our common stock.

During the twelve week period ended May 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 at May 9, 2020, was $247.0 million, compared with
$101.2 million at August 31, 2019, and our total surety bonds commitment at May
9, 2020, was $41.5 million, compared with $36.7 million at August 31, 2019.

Financial Commitments


Except for the previously discussed 364-Day Credit Agreement and debt issuances,
as of May 9, 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.

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  Table of Contents

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 %






                                       29

  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 May 9, 2020 and May 4, 2019.


                                        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 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 $ 1,931,327$ 2,951,134

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      Weeks

Ended 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 August 31, 2019 consists of 53 weeks.

Effective September 1, 2019, the Company adopted ASU 2016-02, Leases (Topic

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 May 9, 2020.




Total lease cost per ASC 842, for the 36 weeks ended May
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 May 9, 2020

(17,127)

Rent expense for the 36 weeks ended May 9, 2020

227,327

Add: Rent expense for the 17 weeks ended August 31, 2019, as previously reported prior to the adoption of ASC 842

108,467

Rent expense for the 53 weeks ended May 9, 2020                $          

335,794

Effective tax rate over trailing four quarters ended May 9, 2020 is 21.5% . (3) Effective tax rate over trailing four quarters ended May 4, 2019 is 28.1% for

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 ended August 31, 2019. Our critical accounting
policies have not changed since the filing of our Annual Report on Form 10-K for
the year ended August 31, 2019.

© Edgar Online, source Glimpses

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Sales 2020 12 272 M - -
Net income 2020 1 579 M - -
Net Debt 2020 4 887 M - -
P/E ratio 2020 17,6x
Yield 2020 -
Capitalization 26 997 M 26 997 M -
EV / Sales 2020 2,60x
EV / Sales 2021 2,43x
Nbr of Employees 75 840
Free-Float 99,4%
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NameTitle
William C. Rhodes Chairman, President & Chief Executive Officer
William T. Giles CFO, EVP-Finance & Information Technology
Jamere Jackson Chief Financial Officer-Elect & Executive VP
Ronald B. Griffin Chief Information Officer & Senior Vice President
Earl G. Graves Lead Independent Director
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