AUTOZONE INC - Quarter Report: 2020 February (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended February 15, 2020, or

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from

Commission file number

1-10714

AUTOZONE, INC.

(Exact name of registrant as specified in its charter)


Nevada		62-1482048
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

123 South Front Street, Memphis, Tennessee		38103
(Address of principal executive offices)		(Zip Code)

(901)

495-6500

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on which Registered
Common Stock ($0.01 par value)	AZO	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐ Emerging growth company ☐		Smaller reporting company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes

☐

No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 Par Value –

23,352,430

hares outstanding as of March 13, 2020.

Table of Contents

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME	4
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT	6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
SIGNATURES		30

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

AUTOZONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


(in thousands)	February 15, 2020			August 31, 2019

Assets
Current assets:
Cash and cash equivalents	$	152,970		$	176,300
Accounts receivable		340,280			308,995
Merchandise inventories		4,606,211			4,319,113
Other current assets		201,086			224,277

Total current assets		5,300,547			5,028,685

Property and equipment:
Property and equipment		7,948,231			7,713,196
Less: Accumulated depreciation and amortization		(3,471,805	)		(3,314,445	)

		4,476,426			4,398,751

Operating lease right-of-use assets		2,579,217			–
Goodwill		302,645			302,645
Deferred income taxes		27,945			26,861
Other long-term assets		176,969			138,971

		3,086,776			468,477

	$	12,863,749		$	9,895,913


Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	4,869,914		$	4,864,912
Current portion of operating lease liabilities		234,506			–
Accrued expenses and other		632,343			621,932
Income taxes payable		42,797			25,297

Total current liabilities		5,779,560			5,512,141

Long-term debt		5,451,471			5,206,344
Operating lease liabilities, less current portion		2,494,840			–
Deferred income taxes		325,263			311,980
Other l ong-term liabilities		523,734			579,299

Commitments and contingencies

Stockholders’ deficit:
Preferred stock, authorized 1,000 shares; no shares issued		–			–
Common stock, par value $.01 per share, authorized 200,000 shares; 23,653 shares issued and 23,488 shares outstanding as of February 15 , 2020 ; 25,445 shares issued and 24,038 shares outstanding as of August 31 , 2019		237			254
Additional paid-in capital		1,241,733			1,264,448
Retained deficit		(2,534,322	)		(1,305,347	)
Accumulated other comprehensive loss		(228,337	)		(269,322	)
Treasury stock, at cost		(190,430	)		(1,403,884	)

Total stockholders’ deficit		(1,711,119	)		(1,713,851	)

	$	12,863,749		$	9,895,913

See Notes to Condensed Consolidated Financial Statements.

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AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Twelve Weeks Ended				Twenty-Four Weeks Ended
(in thousands, except per share data)	February 15, 2020		February 9, 2019		February 15, 2020		February 9, 2019

Net sales	$	2,513,663	$	2,450,568	$	5,306,700	$	5,092,302
Cost of sales, including warehouse and delivery expenses		1,147,600		1,125,461		2,439,569		2,349,721

Gross profit		1,366,063		1,325,107		2,867,131		2,742,581
Operating, selling, general and administrative expenses		958,125		925,087		1,959,170		1,854,742

Operating profit		407,938		400,020		907,961		887,839
Interest expense, net		44,335		41,362		88,078		80,369

Income before income taxes		363,603		358,658		819,883		807,470
Income tax expense		64,321		64,020		170,263		161,426

Net income	$	299,282	$	294,638	$	649,620	$	646,044


Weighted average shares for basic earnings per share		23,570		25,166		23,722		25,397
Effect of dilutive stock equivalents		590		477		604		473

Weighted average shares for diluted earnings per share		24,160		25,643		24,326		25,870


Basic earnings per share	$	12.70	$	11.71	$	27.38	$	25.44

Diluted earnings per share	$	12.39	$	11.49	$	26.70	$	24.97

See Notes to Condensed Consolidated Financial Statements.

AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Twelve Weeks Ended				Twenty-Four Weeks Ended
(in thousands)	February 15, 2020		February 9, 2019		February 15, 2020			February 9, 2019

Net income	$	299,282	$	294,638	$	649,620		$	646,044
Other comprehensive income (loss):
Foreign currency translation adjustments		21,178		39,332		40,218			(1,241	)
Unrealized gains (losses) on marketable debt securities, net of taxes (1)		178		508		(10	)		431
Net derivative activities, net of taxes (2)		388		389		777			778

Total other comprehensive income (loss)		21,744		40,229		40,985			(32	)


Comprehensive income	$	321,026	$	334,867	$	690,605		$	646,012

(1)

Unrealized gains on marketable debt securities are presented net of taxes of $47 in fiscal 2020 and $135 in fiscal 2019 for the twelve weeks ended. Unrealized losses on marketable securities are presented net of tax benefit of $3 in fiscal 2020, and unrealized gains on marketable securities are presented net of taxes of $115 in fiscal 2019 for the twenty-four weeks ended.

(2)	Net derivative activities are presented net of taxes of $120 in fiscal 2020 and fiscal 2019 for the twelve weeks ended and $240 for fiscal 2020 and fiscal 2019 for the twenty-four weeks ended.

See Notes to Condensed Consolidated Financial Statements.

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AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Twenty-Four Weeks Ended
(in thousands)		February 15, 2020			February 9, 2019

Cash flows from operating activities:
Net income		$	649,620		$	646,044
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment and intangibles			180,420			166,230
Amortization of debt origination fees			4,216			3,668
Deferred income taxes			11,154			7,211
Share-based compensation expense			22,107			21,558
Changes in operating assets and liabilities:
Accounts receivable			(28,897	)		(38,338	)
Merchandise inventories			(262,234	)		(364,392	)
Accounts payable and accrued expenses			6,571			256,969
Income taxes payable			11,124			31,701
Other, net			57,563			86,418

Net cash provided by operating activities			651,644			817,069

Cash flows from investing activities:
Capital expenditures			(190,563	)		(195,832	)
Purchase of marketable debt securities			(56,347	)		(21,054	)
Proceeds from sale of marketable debt securities			70,812			34,531
Proceeds from disposal of capital assets and other, net			1,185			6,152

Net cash used in investing activities			(174,913	)		(176,203	)

Cash flows from financing activities:
Net proceeds from commercial paper			242,700			103,500
Net proceeds from sale of common stock			48,705			107,578
Purchase of treasury stock			(764,846	)		(847,097	)
Repayment of principal portion of finance lease liabilities			(29,324	)		(25,529	)

Net cash used in financing activities			(502,765	)		(661,548	)

Effect of exchange rate changes on cash			2,704			(1,477	)


Net (decrease) in cash and cash equivalents			(23,330	)		(22,159	)
Cash and cash equivalents at beginning of period			176,300			217,824

Cash and cash equivalents at end of period		$	152,970		$	195,665

See Notes to Condensed Consolidated Financial Statements.

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AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)


	Twelve Weeks Ended February 15, 2020
(in thousands)	Common Shares Issued			Common Stock			Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Total

Balance at November 23, 2019		25,465		$	254		$	1,282,629		$	(955,009	)	$	(250,081	)	$	(1,853,883	)	$	(1,776,090	)
Net income		–			–			–			299,282			–			–			299,282
Total other comprehensive income		–			–			–			–			21,744			–			21,744
Retirement of treasury shares		(1,912	)		(19	)		(99,686	)		(1,878,595	)		–			1,978,300			–
Purchase of 267 shares of treasury stock		–			–			–			–			–			(314,847	)		(314,847	)
Issuance of common stock under stock options and stock purchase plans		100			2			46,477			–			–			–			46,479
Share-based compensation expense		–			–			12,313			–			–			–			12,313

Balance at February 15, 2020		23,653		$	237		$	1,241,733		$	(2,534,322	)	$	(228,337	)	$	(190,430	)	$	(1,711,119	)


	Twelve Weeks Ended February 9, 2019
(in thousands)	Common Shares Issued			Common Stock			Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Total

Balance at November 17, 2018		27,658		$	277		$	1,209,851		$	(864,191	)	$	(276,066	)	$	(1,728,487	)	$	(1,658,616	)
Net income		–			–			–			294,638			–			–			294,638
Total other comprehensive income		–			–			–			–			40,229			–			40,229
Retirement of treasury shares		(2,563	)		(26	)		(125,442	)		(1,706,972	)		–			1,832,440			–
Purchase of 422 shares of treasury stock		–			–			–			–			–			(350,037	)		(350,037	)
Issuance of common stock under stock options and stock purchase plans		164			2			69,018			–			–			–			69,020
Share-based compensation expense		–			–			10,404			–			–			–			10,404

Balance at February 9, 2019		25,259		$	253		$	1,163,831		$	(2,276,525	)	$	(235,837	)	$	(246,084	)	$	(1,594,362	)


	Twenty-Four Weeks Ended February 15, 2020
(in thousands)	Common Shares Issued			Common Stock			Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Total

Balance at August 31, 2019		25,445		$	254		$	1,264,448		$	(1,305,347	)	$	(269,322	)	$	(1,403,884	)	$	(1,713,851	)
Net income		–			–			–			649,620			–			–			649,620
Total other comprehensive income		–			–			–			–			40,985			–			40,985
Retirement of treasury shares		(1,912	)		(19	)		(99,686	)		(1,878,595	)		–			1,978,300			–
Purchase of 670 shares of treasury stock		–			–			–			–			–			(764,846	)		(764,846	)
Issuance of common stock under stock options and stock purchase plans		120			2			55,299			–			–			–			55,301
Share-based compensation expense		–			–			21,672			–			–			–			21,672

Balance at February 15, 2020		23,653		$	237		$	1,241,733		$	(2,534,322	)	$	(228,337	)	$	(190,430	)	$	(1,711,119	)


	Twenty-Four Weeks Ended February 9, 2019
(in thousands)	Common Shares Issued			Common Stock			Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Total

Balance at August 25, 2018		27,530		$	275		$	1,155,426		$	(1,208,824	)	$	(235,805	)	$	(1,231,427	)	$	(1,520,355	)
Cumulative effect of adoption of ASU 2014-09		–			–			–			(6,773	)		–			–			(6,773	)

Balance at August 25, 2018, as adjusted		27,530		$	275		$	1,155,426		$	(1,215,597	)	$	(235,805	)	$	(1,231,427	)	$	(1,527,128	)
Net income		–			–			–			646,044			–			–			646,044
Total other comprehensive loss		–			–			–			–			(32	)		–			(32	)
Retirement of treasury shares		(2,563	)		(26	)		(125,442	)		(1,706,972	)		–			1,832,440			–
Purchase of 1,076 shares of treasury stock		–			–			–			–			–			(847,097	)		(847,097	)
Issuance of common stock under stock options and stock purchase plans		292			4			113,942			–			–			–			113,946
Share-based compensation expense		–			–			19,905			–			–			–			19,905

Balance at February 9, 2019		25,259		$	253		$	1,163,831		$	(2,276,525	)	$	(235,837	)	$	(246,084	)	$	(1,594,362	)

See Notes to Condensed Consolidated Financial Statements.

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AUTOZONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A – General

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form

10-Q

and Article 10 of Regulation S-X of the Securities and Exchange Commission’s (the “SEC”) rules and regulations. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and related notes included in the AutoZone, Inc. (“AutoZone” or the “Company”) Annual Report on Form

10-K

for the year ended August 31, 2019.

Operating results for the twelve and twenty-four weeks ended February 15, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 29, 2020. Each of the first three quarters of AutoZone’s 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.

Recently Adopted Accounting Pronouncements:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2016-02,

Leases (Topic 842)

, and subsequently amended this update by issuing additional ASU’s that provided clarification and further guidance for areas identified as potential implementation issues. ASU 2016-02 requires a

two-fold

approach for lessee accounting, under which a lessee will account for leases as finance leases or operating leases. For all leases with original terms greater than 12 months, both lease classifications will result in the lessee recognizing a

right-of-use

asset and a corresponding lease liability on its balance sheet, with differing methodologies for income statement recognition. This guidance also requires certain quantitative and qualitative disclosures about leasing arrangements. ASU

2016-02

and its amendments were effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption was permitted. The ASU’s transition provisions could be applied under a modified retrospective approach to each prior reporting period presented in the financial statements or only at the beginning of the period of adoption using the alternative transition method

The Company adopted this standard and its amendments as of September 1, 2019, using the modified retrospective transition method. Under this method, existing leases were recorded at the adoption date, comparative periods were not restated and prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for the prior periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of prior lease identification under Accounting Standards Codification (“ASC”) Topic 840. The Company made the accounting policy election for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term. The Company also elected the practical expedient to not separate lease components from the

non-lease

components (typically fixed common-area maintenance costs at its retail store locations) for all classes of leased assets, except vehicles. The Company chose not to elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Adoption of the leasing standard resulted in operating lease

right-of-use

assets of approximately $2.5 billion and operating lease liabilities of approximately $2.7 billion as of September 1, 2019. Existing prepaid and deferred rent were netted and recorded as an offset to our gross operating lease

right-of-use

assets. There was no adjustment to the opening balance of retained earnings upon adoption. The standard did not have a material impact on the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Statement

of Cash Flows or covenant compliance under its existing credit agreement. Refer to “Note

–

Leases”.

In June 2018, the FASB issued ASU

2018-07,

Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

. ASU

2018-07

aims to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted this standard beginning with its first quarter ending November 23, 2019. The Company determined that the provisions of ASU

2018-07

did not have an impact on its Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets or Condensed Consolidated Statements of Cash Flows.

Recently Issued Accounting Pronouncements:

In August 2018, the FASB issued ASU

2018-15,

Intangibles – Goodwill and Other Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain

internal-use

software. ASU

2018-15

is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company will adopt this standard beginning with its first quarter ending November 21, 2020. The Company is currently evaluating the new guidance to determine the impact the adoption will have on its Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets or Condensed Consolidated Statements of Cash Flows.

In June 2016, the FASB issued ASU

2016-13,

Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

which was subsequently amended in November 2018 through ASU

2018-19,

Codification Improvements to Topic 326, Financial Instruments Credit Losses

. ASU

2016-13

will require entities to estimate lifetime expected credit losses for trade and other receivables, net investments in leases, financial receivables, debt securities, and other instruments, which will result in earlier recognition of credit losses.

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Further, the new credit loss model will affect how entities estimate their allowance for loss receivables that are current with respect to their payment terms. ASU

2016-13

will be effective for the Company at the beginning of its fiscal 2021 year. The Company will adopt this standard beginning

with

its first quarter ending November 21, 2020. The Company is currently evaluating the new guidance to determine the impact the adoption will have on the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheet

or Condensed Consolidated Statement

of Cash Flows.

Note B – Share-Based Payments

AutoZone maintains several equity incentive plans, which provide equity-based compensation to

non-employee

directors and eligible employees for their service to AutoZone, its subsidiaries or affiliates. The Company recognizes compensation expense for share-based payments based on the fair value of the awards at the grant date. Share-based payments include stock option grants, restricted stock grants, restricted stock unit grants, stock appreciation rights, discounts on shares sold to employees under share purchase plans and other awards. Additionally, directors’ fees are paid in restricted stock units with value equivalent to the value of shares of common stock as of the grant date. The change in fair value of liability-based stock awards is also recognized in share-based compensation expense.

Stock Options:

The Company made stock option grants of

188,324

shares during the twenty-four week period ended February

2020

and granted options to purchase

172,588

shares during the comparable prior year period. The Company grants options to purchase common stock to certain of its employees under its plan at prices equal to the market value of the stock on the date of grant. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date.

The weighted average fair value of the stock option awards granted during the twenty-four week periods ended February 15, 2020 and February 9, 2019, using the Black-Scholes-Merton multiple-option pricing valuation model, was $252.39 and $208.33 per share, respectively, using the following weighted average key assumptions:


	Twenty-Four Weeks Ended
	February 15, 2020		February 9, 2019

Expected price volatility		22%		21%
Risk-free interest rate		1.4%		3.0%
Weighted average expected lives (in years)		5.5		5.6
Forfeiture rate		10%		10%
Dividend yield		0%		0%

During the twenty-four week period ended February 15, 2020, 105,860 stock options were exercised at a weighted average exercise price of $476.60. In the comparable prior year period, 283,210 stock options were exercised at a weighted average exercise price of $390.26.

Restricted Stock Units:

Restricted stock unit awards are valued at the market price of a share of the Company’s stock on the date of grant. Grants of employee restricted stock units vest ratably on an annual basis over a four-year service period and are payable in shares of common stock on the vesting date. Compensation expense for grants of employee restricted stock units is recognized on a straight-line basis over the four-year service period, less estimated forfeitures, which are consistent with stock option forfeiture assumptions. Grants of

non-employee

director restricted stock units are made and expensed on January 1 of each year, as they vest immediately.

As of February 15, 2020, total unrecognized stock-based compensation expense related to nonvested restricted stock unit awards, net of estimated forfeitures, was approximately $10.9 million, before income taxes, which we expect to recognize over an estimated weighted average period of 3.1 years.

Transactions related to restricted stock units for the twenty-four weeks ended February 15, 2020 were as follows:


	Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested at August 31, 2019		10,049		$	773.61
Granted		8,735			1,086.61
Vested		(4,183	)		945.58
Canceled or forfeited		(165	)		929.33

Nonvested at February 15, 2020		14,436		$	911.39

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Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $12.1 million for the twelve week period ended February 15, 2020, and $11.0 million for the comparable prior year period. Total share-based compensation expense was $22.1 million for the twenty-four week period ended February 15, 2020, and $21.6 million for the comparable prior year period.

For the twelve week period ended February 15, 2020, 188,486 stock options were excluded from the diluted earnings per share computation because they would have been anti-dilutive. For the comparable prior year period, 170,069 anti-dilutive shares were excluded from the dilutive earnings per share computation. There were 147,998 anti-dilutive shares excluded from the diluted earnings per share computation for the twenty-four week period ended February 15, 2020, and 188,999 anti-dilutive shares excluded for the comparable prior year period.

See AutoZone’s Annual Report on Form

10-K

for the year ended August 31, 2019, for a discussion regarding the methodology used in developing AutoZone’s assumptions to determine the fair value of the option awards and a description of AutoZone’s Amended and Restated 2011 Equity Incentive Award Plan, the 2011 Director Compensation Program and the 2014 Director Compensation Plan.

Note C – Fair Value Measurements

The Company defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with ASC 820,

Fair Value Measurements and Disclosures

, the Company uses the fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are set forth below:

Level 1 inputs

—unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 inputs

—inputs other than quoted market prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability.

Level 3 inputs

—unobservable inputs for the asset or liability, which are based on the Company’s own assumptions as there is little, if any, observable activity in identical assets or liabilities.

Marketable Debt Securities Measured at Fair Value on a Recurring Basis

The Company’s assets measured at fair value on a recurring basis were as follows:


	February 15, 2020
(in thousands)	Level 1		Level 2		Level 3		Fair Value

Other current assets	$	47,079	$	872	$	–	$	47,951
Other long-term assets		67,355		9,141		–		76,496

	$	114,434	$	10,013	$	–	$	124,447


	August 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Fair Value

Other current assets	$	65,344	$	2,614	$	–	$	67,958
Other long-term assets		65,573		5,395		–		70,968

	$	130,917	$	8,009	$	–	$	138,926

At February 15, 2020, the fair value measurement amounts for assets and liabilities recorded in the accompanying Condensed Consolidated Balance Sheets consisted of short-term marketable debt securities of $48.0 million, which are included within Other current assets, and long-term marketable debt securities of $76.5 million, which are included in Other long-term assets. The Company’s marketable debt securities are typically valued at the closing price in the principal active market as of the last business day of the quarter or through the use of other market inputs relating to the securities, including benchmark yields and reported trades. The fair values of the marketable debt securities, by asset class, are described in “Note D – Marketable Debt Securities.”

Financial Instruments not Recognized at Fair Value

The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in “Note G – Financing.”

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Note D – Marketable Debt Securities

The Company’s basis for determining the cost of a security sold is the “Specific Identification Model.” Unrealized gains (losses) on marketable debt securities are recorded in Accumulated other comprehensive loss. The Company’s available-for-sale marketable debt securities consisted of the following:


	February 15, 2020
(in thousands)	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Corporate debt securities	$	33,784	$	62	$	–		$	33,846
Government bonds		57,554		662		–			58,216
Mortgage-backed securities		3,414		12		(8	)		3,418
Asset-backed securities and other		28,956		13		(2	)		28,967

	$	123,708	$	749	$	(10	)	$	124,447


	August 31, 2019
(in thousands)	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Corporate debt securities	$	36,998	$	29	$	(19	)	$	37,008
Government bonds		45,741		763		–			46,504
Mortgage-backed securities		2,089		2		(15	)		2,076
Asset-backed securities and other		53,345		–		(7	)		53,338

	$	138,173	$	794	$	(41	)	$	138,926

The debt securities held at February 15, 2020, had effective maturities ranging from less than one year to approximately three years. The Company did not realize any material gains or losses on its marketable debt securities during the twenty-four week period ended February 15, 2020.

The Company holds 19 securities that are in an unrealized loss position of approximately $10 thousand at February 15, 2020. The Company has the intent and ability to hold these investments until recovery of fair value or maturity and does not deem the investments to be impaired on an other than temporary basis. In evaluating whether the securities are deemed to be impaired on an other than temporary basis, the Company considers factors such as the duration and severity of the loss position, the credit worthiness of the investee, the term to maturity and the intent and ability to hold the investments until maturity or until recovery of fair value.

Included above in total

available-for-sale

marketable debt securities are $29.5 million of marketable debt securities transferred by the Company’s insurance captive to a trust account to secure its obligations to an insurance company related to future workers’ compensation and casualty losses.

Note E – Derivative Financial Instruments

At February 15, 2020, the Company had $4.6 million recorded in Accumulated other comprehensive loss related to realized losses associated with terminated interest rate swap and treasury rate lock derivatives, which were designated as hedging instruments. Net losses are amortized into Interest expense over the remaining life of the associated debt. During the twelve week period ended February 15, 2020, the Company reclassified $508 thousand of net losses from Accumulated other comprehensive loss to Interest expense. During the comparable prior year period, the Company reclassified $509 thousand of net losses from Accumulated other comprehensive loss to Interest expense. During the twenty-four week period ended February 15, 2020 and the comparable prior year period, the Company reclassified $1.0 million of net losses from Accumulated other comprehensive loss to Interest expense. The Company expects to reclassify $1.8 million of net losses from Accumulated other comprehensive loss to Interest expense over the next 12 months.

Note F – Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market. Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the

last-in,

first-out

(“LIFO”) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to historical price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is not to write up inventory in excess of replacement cost, which is based on average cost. The difference between LIFO cost and replacement cost, which has been slightly reduced due to recent price inflation on the Company’s merchandise purchases, was $354.7 million at February 15, 2020 and $404.9 million at August 31, 2019.

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Note G – Financing

The Company’s long-term debt consisted of the following:


(in thousands)	February 15, 2020			August 31, 2019

4.000% Senior Notes due November 2020, effective interest rate of 4.43%		$	500,000		$	500,000
2.500% Senior Notes due April 2021, effective interest rate of 2.62%			250,000			250,000
3.700% Senior Notes due April 2022, effective interest rate of 3.85%			500,000			500,000
2.875% Senior Notes due January 2023, effective interest rate of 3.21%			300,000			300,000
3.125% Senior Notes due July 2023, effective interest rate of 3.26%			500,000			500,000
3.125% Senior Notes due April 2024, effective interest rate 3.32%			300,000			300,000
3.250% Senior Notes due April 2025, effective interest rate 3.36%			400,000			400,000
3.125% Senior Notes due April 2026, effective interest rate of 3.28%			400,000			400,000
3.750% Senior Notes due June 2027, effective interest rate of 3.83%			600,000			600,000
3.750% Senior Notes due April 2029, effective interest rate of 3.86%			450,000			450,000
Commercial paper, weighted average interest rate of 1.72% and 2.28% at February 15, 2020 and August 31, 2019, respectively			1,272,700			1,030,000

Total debt before discounts and debt issuance costs			5,472,700			5,230,000
Less: Discounts and debt issuance costs			21,229			23,656

Long-term debt		$	5,451,471		$	5,206,344

As of February 15, 2020, the commercial paper borrowings and the $500 million 4.000% Senior Notes due November 2020 are classified as long-term in the accompanying Consolidated Balance Sheets as the Company has the ability and intent to refinance them on a long-term basis through available capacity in its revolving credit facility. As of February 15, 2020, the Company had $1.997 billion of availability under its $2.0 billion revolving credit facility, which would allow it to replace these short-term obligations with long-term financing facilities.

The Company 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) the Company’s borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion; (ii) the Company’s option to increase its 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 the Company’s 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) the Company has 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, the Company 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 the Company’s senior, unsecured,

(non-credit

enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the Revolving Credit Agreement. As of February 15, 2020, the Company had $3.2 million of outstanding letters of credit under the Revolving Credit Agreement.

The fair value of the Company’s debt was estimated at $5.678 billion as of February 15, 2020, and $5.419 billion as of August 31, 2019, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same terms (Level 2). Such fair value is

greater

than the carrying value of debt by $226.6 million at February 15, 2020, which reflects their face amount, adjusted for any unamortized debt issuance costs and discounts. At August 31, 2019, the fair value was greater than the carrying value of debt by $212.7 million.

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 the Company experiences a change in control (as defined in the agreements). The Company’s borrowings under its senior notes contain minimal covenants, primarily restrictions on liens. Under its 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 its borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs. As of February 15, 2020, the Company was in compliance with all covenants and expects to remain in compliance with all covenants under its borrowing arrangements.

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Note H – Stock Repurchase Program

From January 1, 1998 to February 15, 2020, the Company has repurchased a total of 147.5 million shares of its common stock at an aggregate cost of $22.188 billion, including 669,967 shares of its common stock at an aggregate cost of $764.8 million during the twenty-four week period ended February 15, 2020. On October 7, 2019, the Board voted to increase the repurchase authorization by $1.25 billion. This raised the total value of shares authorized to be repurchased to $23.15 billion. Considering the cumulative repurchases as of February 15, 2020, the Company had $961.9 million remaining under the Board’s authorization to repurchase its common stock.

During the twenty-four week period ended February 15, 2020, the Company retired 1.9 million shares of treasury stock which had previously been repurchased under the Company’s share repurchase program. The retirement increased Retained deficit by $1.879 billion and decreased Additional

paid-in

capital by $99.7 million. During the comparable prior year period, the Company retired 2.6 million shares of treasury stock, which increased Retained deficit by $1.707 billion and decreased Additional

paid-in

capital by $125.4 million.

Subsequent to February 15, 2020, the Company has repurchased

156,035

shares of its common stock at an aggregate cost of

$166.1

million.

Note I – Accumulated Other Comprehensive Loss

Accumulated

other comprehensive loss includes foreign currency translation adjustments, activity for interest rate swaps and treasury rate locks that qualify as cash flow hedges and unrealized gains (losses) on

available-for-sale

debt securities. Changes in Accumulated other comprehensive loss for the twelve week periods ended February 15, 2020 and February 9, 2019 consisted of the following:


(in thousands)	Foreign Currency and Other (2)			Net Unrealized Gain (Loss) on Securities			Derivatives			Total

Balance at November 23, 2019	$	(246,558	)	$	403		$	(3,926	)	$	(250,081	)
Other comprehensive income before reclassifications (1)		21,178			180			–			21,358
Amounts reclassified from Accumulated other comprehensive (loss) income ( 1 )		–			(2	)		388	(3)		386

Balance at February 15, 2020	$	(225,380	)	$	581		$	(3,538	)	$	(228,337	)


(in thousands)	Foreign Currency and Other (2)			Net Unrealized Gain (Loss) on Securities			Derivatives			Total

Balance at November 17, 2018	$	(269,472	)	$	(950	)	$	(5,644	)	$	(276,066	)
Other comprehensive income before reclassifications (1)		39,332			507			–			39,839
Amounts reclassified from Accumulated other comprehensive income ( 1 )		–			1			389	(3)		390

Balance at February 9, 2019	$	(230,140	)	$	(442	)	$	(5,255	)	$	(235,837	)

(1)	Amounts in parentheses indicate debits to Accumulated other comprehensive loss.

(2)	Foreign currency is shown net of U.S. tax to account for foreign currency impacts of certain undistributed non-U.S. subsidiaries earnings. Other foreign currency is not shown net of additional U.S. tax as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested.

(3)	Represents gains on derivatives, net of taxes of $120 for the twelve weeks ended February 15, 2020 and February 9, 2019, which is recorded in Interest expense, net, on the Condensed Consolidated Statements of Income. See “Note E – Derivative Financial Instruments” for further discussion.

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Changes in Accumulated other comprehensive loss for the twenty-four week periods ended February 15, 2020 and February 9, 2019 consisted of the following:


(in th ousands)	Foreign Currency and Other (2)			Net Unrealized Gain (Loss) on Securities			Derivatives			Total

Balance at August 31, 2019	$	(265,598	)	$	591		$	(4,315	)	$	(269,322	)
Other comprehensive income (loss) before reclassifications (1)		40,218			(53	)		–			40,165
Amounts reclassified from Accumulated other comprehensive income (loss) (1)		–			43	(3)		777	(4)		820

Balance at February 15, 2020	$	(225,380	)	$	581		$	(3,538	)	$	(228,337	)

(in th ousands)	Foreign Currency and Other (2)			Net Unrealized Gain (Loss) on Securities			Derivatives			Total

Balance at August 25, 2018	$	(228,899	)	$	(873	)	$	(6,033	)	$	(235,805	)
Other comprehensive income (loss) before reclassifications (1)		(1,241	)		430			–			(811	)
Amounts reclassified from Accumulated other comprehensive (loss) (1)		–			1			778	(4)		779
Balance at February 9, 2019	$	(230,140	)	$	(442	)	$	(5,255	)	$	(235,837	)

(1)

Amounts in parentheses indicate debits to Accumulated other comprehensive loss.

(2)

Foreign currency is shown net of U.S. tax to account for foreign currency impacts of certain undistributed

non-U.S.

subsidiaries earnings. Other foreign currency is not shown net of additional U.S. tax as other basis differences of

non-U.S.

subsidiaries are intended to be permanently reinvested.

(3)

Represents realized losses on marketable debt securities, net of tax benefit of $12 for the twenty-four weeks ended February 15, 2020, which is recorded in Operating, selling general and administrative expenses on the Condensed Consolidated Statements of Income. See “Note D – Marketable Debt Securities” for further discussion.

(4)

Represents gains on derivatives, net of taxes of $240 for the twenty-four weeks ended February 15, 2020 and February 9, 2019, which is recorded in Interest expense, net, on the Condensed Consolidated Statements of Income. See “Note E – Derivative Financial Instruments” for further discussion.

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Note J – Goodwill and Intangibles

As of February 15, 2020, there were no changes to the carrying amount of goodwill as described in our Annual Report on Form

10-K

for the year ended August 31, 2019.

The carrying amounts of intangible assets are included in Other long-term assets as follows:


(in thousands)	Estimated Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Amortizing intangible assets:
Technology		3-5 years	$	870	$	(870	)	$	–
Customer relationships		3-10 years		29,376		(25,685	)		3,691

Total intangible assets other than goodwill			$	30,246	$	(26,555	)	$	3,691

Amortization expense of intangible assets for the twelve and twenty-four week periods ended February 15, 2020 and February 9, 2019 were $1.0 million and $1.9 million, respectively.

Note K – Litigation

The Company is involved in various legal proceedings incidental to the conduct of its business, including, but not limited to, several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices. While the resolution of these matters cannot be predicted with certainty, management does not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets or Condensed Consolidated Statements of Cash Flows.

Note L – Leases

The Company adopted ASU

2016-02,

Leases (Topic 842)

, beginning with its first quarter ended November 23, 2019 which requires leases to be recognized on the balance sheet. Leases with an original term of 12 months or less are not recognized in the Company’s Condensed Consolidated Balance Sheet

, and the lease expense related to these short-term leases is recognized over the lease term. The Company elected the practical expedient to not separate lease components from the

non-lease

components, which includes fixed common-area maintenance costs at its retail store locations, for all classes of leased assets, except vehicles. Our vehicle leases typically include variable

non-lease

components, such as maintenance and fuel charges, which contain observable standalone prices. We have elected to exclude these variable

non-lease

components from vehicle lease payments for the purpose of calculating the

right-of-use

assets and liabilities. These variable lease payments are expensed as incurred.

The Company’s leases primarily relate to its retail stores, distribution centers and vehicles under various

non-callable

leases. Leases are categorized at their commencement date, which is the date the Company takes possession or control of the underlying asset. Most of the Company’s leases are operating leases; however, certain land and vehicles are leased under finance leases. The leases have varying terms and expire at various dates through 2040. Retail leases typically have initial terms of between one and 20 years, with one to six optional renewal periods of one to five years each. Finance leases for vehicles typically have original terms between one and five years and finance leases for real estate leases typically have terms of 20 or more years. The exercise of lease renewal options is at our sole discretion. The Company evaluates renewal options at lease commencement and on an ongoing basis and includes options that are reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. The Company subleases certain properties that are not used in its operations. Sublease income was not significant for the periods presented. Certain lease agreements require variable payments based upon actual costs of common-area maintenance, real estate taxes and insurance. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Our finance leases for vehicles have a stated borrowing rate which we use in determining the present value of the lease payments over the lease term. Substantially all our operating leases and finance leases for real estate do not provide a stated borrowing rate. Accordingly, we use the Company’s incremental borrowing rate at commencement or modification date in determining the present value of lease payments over the lease term. For operating leases that commenced prior to the date of adoption of the new standard, the Company used the incremental borrowing rate that corresponded to the remaining lease term as of the date of adoption.

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Lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheet are as follows:


(in thousands)	Classification	February 15 , 2020

Assets:
Operating	Operating lease right-of-use assets	$	2,579,217
Finance	Property and equipment		294,449

Total lease assets		$	2,873,666

Liabilities: Current:
Operating	Current portion of operating lease liabilities	$	234,506
Finance	Accrued expenses and other		58,864
Noncurrent:
Operating	Operating lease liabilities, less current portion		2,494,840
Finance	Other long-term liabilities		137,182

Total lease liabilities		$	2,925,392

Accumulated amortization related to

inance lease assets was $93.4 million as of February 15, 2020.

Lease costs for finance and operating leases for the twelve and twenty-four weeks ended February 15, 2020 are as follows:


(in thousands)	Statement of Income Location	Twelve Weeks Ended February 15, 2020		Twenty-Four Weeks Ended February 15, 2020

Finance lease cost:
Amortization of lease assets	Depreciation and amortization	$	12,872	$	25,528
Interest on lease liabilities	Interest expense, net		1,282		2,667
Operating lease cost (1)	Selling, general and administrative expenses		80,396		162,195

Total lease cost		$	94,550	$	190,390

(

1) Includes short-term leases, variable lease costs and sublease income, which are immaterial.

The future rental payments, inclusive of renewal options that have been included in defining the expected lease term, of our operating and finance lease obligations as of February 15, 2020 having initial or remaining lease terms in excess of one year are as follows:


(in thousands)	Finance Leases			Operating Leases			Total

2020	$	30,419		$	159,455		$	189,874
2021		61,560			320,472			382,032
2022		48,694			310,948			359,642
2023		33,567			291,256			324,823
2024		11,328			267,176			278,504
Thereafter		39,598			2,232,620			2,272,218

Total lease payments		225,166			3,581,927			3,807,093
Less: Interest		(29,120	)		(852,581	)		(881,701	)

Present value of lease liabilities	$	196,046		$	2,729,346		$	2,925,392

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The following table summarizes the Company’s lease term and discount rate assumptions:


	February 15, 2020
Weighted-average remaining lease term in years, inclusive of renewal options that are reasonably certain to be exercised
Finance leases – real estate		30
Finance leases – vehicles		3
Operating leases		15
Weighted-average discount rate:
Finance leases – real estate		3.23%
Finance leases – vehicles		2.72%
Operating leases		3.55%

The following table summarizes the other information related to the Company’s lease liabilities:


(in thousands)	Twenty-Four Weeks Ended February 15, 2020

Cash paid for amounts included in the measurement of lease liabilities – operating cash flows from operating leases	$	98,021
Leased assets obtained in exchange for new finance lease liabilities		45,582
Leased assets obtained in exchange for new operating lease liabilities		174,038

As of February 15

, 2020

, the Company has entered into additional leases which have not yet commenced and are therefore not part of the

right-of-use

asset and liability. These leases are generally for real estate and have undiscounted future payments of approximately $31.1

million and will commence when the Company obtains possession of the underlying leased asset. Commencement dates are expected to be from fiscal 2020

to fiscal 2022

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Note M – Segment Reporting

The Company’s operating segments (Domestic Auto Parts, Mexico and Brazil) are aggregated as one reportable segment: Auto Parts Stores. The criteria the Company used to identify the reportable segment are primarily the nature of the products the Company sells and the operating results that are regularly reviewed by the Company’s chief operating decision maker to make decisions about the resources to be allocated to the business units and to assess performance. The accounting policies of the Company’s reportable segment are the same as those described in “Note A – Significant Accounting Policies” in its Annual Report on Form

10-K

for the year ended August 31, 2019.

The Auto Parts Stores segment is a retailer and distributor of automotive parts and accessories through the Company’s 6,461 stores in the U.S., Mexico and 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.

The Other category reflects business activities of two operating segments that are not separately reportable due to the materiality of these operating segments. The operating segments include ALLDATA, which produces, sells and maintains diagnostic and repair information software used in the automotive repair industry, and

E-commerce,

which includes direct sales to customers through www.autozone.com for sales that are not fulfilled by local stores.

The Company evaluates its reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. Segment results for the periods presented were as follows:


	Twelve Weeks Ended						Twenty-Four Weeks Ended

(in thousands)	February 15, 2020			February 9, 2019			February 15, 2020			February 9, 2019

Net Sales
Auto Parts Stores	$	2,464,988		$	2,402,833		$	5,208,226		$	4,996,273
Other		48,675			47,735			98,474			96,029

Total	$	2,513,663		$	2,450,568		$	5,306,700		$	5,092,302


Segment Profit
Auto Parts Stores	$	1,331,270		$	1,291,186		$	2,797,431		$	2,674,751
Other		34,793			33,921			69,700			67,830

Gross profit		1,366,063			1,325,107			2,867,131			2,742,581
Operating, selling, general and administrative expenses		(958,125	)		(925,087	)		(1,959,170	)		(1,854,742	)
Interest expense, net		(44,335	)		(41,362	)		(88,078	)		(80,369	)

Income before income taxes	$	363,603		$	358,658		$	819,883		$	807,470

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AutoZone, Inc.

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of AutoZone, Inc. (the Company) as of February 15, 2020, the related condensed consolidated statements of income, comprehensive income and stockholders’ deficit for the twelve and twenty-four week periods ended February 15, 2020 and February 9, 2019, the condensed consolidated statements of cash flows for the twenty-four week periods ended February 15, 2020 and February 9, 2019, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of August 31, 2019, the related consolidated statements of income, comprehensive income, stockholders’ deficit and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated October 28, 2019, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of August 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial

statements

consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Ernst & Young LLP

Memphis, Tennessee

March

, 2020

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In Management’s Discussion and Analysis (“MD&A”), we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect the future results of AutoZone, Inc. (“AutoZone” or the “Company”). The following MD&A discussion should be read in conjunction with our Condensed Consolidated Financial Statements, related notes to those statements and other financial information, including forward-looking statements and risk factors, that appear elsewhere in this Quarterly Report on Form

10-Q,

our Annual Report on Form

10-K

for the year ended August 31, 2019 and other filings with the SEC.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form

10-Q

constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy”, “seek”, “may”, “could” and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation: product demand; energy prices; weather; competition; credit market conditions; cash flows; access to available and feasible financing; future stock repurchases; the impact of recessionary conditions; consumer debt levels; changes in laws or regulations; war and the prospect of war, including terrorist activity; inflation; the ability to hire, train and retain qualified employees; construction delays; the compromising of confidentiality, availability, or integrity of information, including cyber attacks; historic growth rate sustainability; downgrade of our credit ratings; damages to our reputation; challenges in international markets; failure or interruption of our information technology systems; origin and raw material costs of suppliers; disruption in our supply chain, due to public health epidemics or otherwise; impact of tariffs; anticipated impact of new accounting standards; and business interruptions. Certain of these risks and uncertainties are discussed in more detail in the “Risk Factors” section contained in Item 1A under Part 1 of our Annual Report on Form

10-K

for the year ended August 31, 2019, and these Risk Factors should be read carefully. Forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the “Risk Factors” could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

Overview

We are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in the Americas. We began operations in 1979 and at February 15, 2020, operated 5,815 stores in the U.S., 608 stores in Mexico and 38 stores in Brazil. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and

non-automotive

products. At February 15, 2020, in 4,942 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. We also have commercial programs in stores in Mexico and Brazil. We also sell the ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com. Additionally, we sell automotive hard parts, maintenance items, accessories and

non-automotive

products through www.autozone.com and our commercial customers can make purchases through www.autozonepro.com. We also provide product information on our Duralast branded products through www.duralastparts.com. We do not derive revenue from automotive repair or installation services.

Operating results for the twelve and twenty-four weeks ended February 15, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending August 29, 2020. Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarter of fiscal 2020 has 16 weeks and fiscal 2019 had 17 weeks. Our business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September and the lowest sales generally occurring in the months of December and January.

Executive Summary

Net sales were up 2.6% for the quarter driven by new stores, partially offset by a decrease in domestic same store sales (sales from stores open at least one year) of (0.8%). Domestic commercial sales increased 8.2%, which represents 22% of our total sales. Operating profit increased 2.0% to $407.9 million, while net income for the quarter increased 1.6% over the same period last year to $299.3 million. Diluted earnings per share increased 7.8% to $12.39 per share from $11.49 per share in the comparable prior year period.

Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to fuel costs, wage rates and other economic conditions. Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.

Additionally, the current outbreak of a novel strain of the coronavirus (“COVID-19”), which originated in China and has spread globally, has led to adverse impacts on the national and global economy. We have created contingency plans for those merchandise categories believed to be at risk, including those sourced from China and elsewhere, and continue to review and update our plans as circumstances evolve. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities and other unintended consequences. Accordingly, continued business disruption relating to the COVID-19 outbreak may negatively impact demand for our products, our store hours and our workforce availability and may also magnify risks associated with sourcing quality merchandise domestically and outside the U.S. at favorable prices, all of which would adversely impact our business and results of operations.

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During the second quarter of fiscal 2020, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 85% of total sales with discretionary making up the remaining, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix. We did not experience any fundamental shifts in our category sales mix as compared to the previous year. Our sales mix can be impacted by severe or unusual weather over a short-term period. Over the long-term, we believe the impact of the weather on our sales mix is not significant.

The two statistics we believe have the most positive correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road. While over the long-term we have seen a positive correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including the number of seven year old or older vehicles on the road. The average age of the U.S. light vehicle fleet continues to trend in our industry’s favor. According to the latest data provided by the Auto Care Association as of January 1, 2019, for the 8

consecutive year, the average age of vehicles on the road has exceeded 11 years. Since the beginning of the fiscal year and through November 2019 (latest publicly available information), miles driven in the U.S. have been essentially flat.

Twelve Weeks Ended February 15, 2020

Compared with Twelve Weeks Ended February 9, 2019

Net sales for the twelve weeks ended February 15, 2020 increased $63.1 million to $2.514 billion, or 2.6%, over net sales of $2.451 billion for the comparable prior year period. Total auto parts sales increased by 2.6%, primarily driven by net sales of $56.5 million from new stores, partially offset by a decrease in domestic same store sales of (0.8%). Domestic commercial sales increased $42.3 million, or 8.2%, to $556.9 million over the comparable prior year period.

Gross profit for the twelve weeks ended February 15, 2020 was $1.366 billion, compared with $1.325 billion during the comparable prior year period. Gross profit, as a percentage of sales was 54.3% compared to 54.1% during the comparable prior year period. The increase in gross margin was primarily driven by supply chain leverage.

Operating, selling, general and administrative expenses for the twelve weeks ended February 15, 2020 were $958.1 million, or 38.1% of net sales, compared with $925.1 million, or 37.7% of net sales during the comparable prior year period. Operating expenses, as a percentage of sales, were higher than last year with deleverage primarily driven by domestic store payroll.

Net interest expense for the twelve weeks ended February 15, 2020 was $44.3 million compared with $41.4 million during the comparable prior year period. The increase was primarily due to an increase in average borrowing levels over the comparable prior year period. Average borrowings for the twelve weeks ended February 15, 2020 were $5.464 billion, compared with $5.119 billion for the comparable prior year period. Weighted average borrowing rates were 3.0% for the twelve weeks ended February 15, 2020 and 3.1% for the twelve weeks ended February 9, 2019.

Our effective income tax rate was 17.7% of pretax income for the twelve weeks ended February 15, 2020, and 17.8% for the comparable prior year period.

Net income for the twelve week period ended February 15, 2020 increased by $4.6 million to $299.3 million due to the factors set forth above, and diluted earnings per share increased by 7.8% to $12.39 from $11.49 in the comparable prior year period. The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $0.55.

Twenty-Four Weeks Ended February 15, 2020

Compared with Twenty-Four Weeks Ended February 9, 2019

Net sales for the twenty-four weeks ended February 15, 2020 increased $214.4 million to $5.307 billion, or 4.2%, over net sales of $5.092 billion for the comparable prior year period. Total auto parts sales increased by 4.2%, primarily driven by net sales of $106.6 million from new stores and an increase in domestic same store sales of 1.4%. Domestic commercial sales increased $116.9 million, or 11.0%, to $1.178 billion over the comparable prior year period.

Gross profit for the twenty-four weeks ended February 15, 2020 was $2.867 billion, or 54.0% of net sales, compared with $2.743 billion, or 53.9% of net sales, during the comparable prior year period. The increase in gross margin was primarily driven by supply chain leverage.

Operating, selling, general and administrative expenses for the twenty-four weeks ended February 15, 2020 were $1.959 billion, or 36.9% of net sales, compared with $1.855 billion, or 36.4% of net sales. Deleverage was primarily driven by domestic store payroll.

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Net interest expense for the twenty-four weeks ended February 15, 2020 was $88.1 million compared with $80.4 million during the comparable prior year period. The increase was primarily due to an increase in average borrowing levels over the comparable prior year period. Average borrowings for the twenty-four weeks ended February 15, 2020 were $5.327 billion, compared with $5.045 billion for the comparable prior year period. Weighted average borrowing rates were 3.1% for each of the twenty-four week periods ended February 15, 2020 and February 9, 2019.

Our effective income tax rate was 20.8% of pretax income for the twenty-four weeks ended February 15, 2020, and 20.0% for the comparable prior year period. The increase in the tax rate was primarily attributable to a reduced benefit from stock options exercised during the twenty-four weeks ended February 15, 2020 compared to the comparable prior year period. The benefit of stock options exercised for the twenty-four week period ended February 15, 2020 was $16.5 million compared to $25.2 million in the comparable prior year period.

Net income for the twenty-four week period ended February 15, 2020 increased by $3.6 million to $649.6 million due to the factors set forth above, and diluted earnings per share increased by 6.9% to $26.70 from $24.97 in the comparable prior year period. The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $1.09.

Liquidity and Capital Resources

The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories. For the twenty-four weeks ended February 15, 2020, our net cash flows from operating activities provided $651.6 million as compared with $817.1 million provided during the comparable prior year period. The decrease is primarily due to unfavorable changes in inventories, net of accounts payable.

Our net cash flows used in investing activities for the twenty-four weeks ended February 15, 2020 were $174.9 million as compared with $176.2 million in the comparable prior year period. Capital expenditures for the twenty-four weeks ended February 15, 2020 were $190.6 million compared to $195.8 million for the comparable prior year period. During the twenty-four week period ended February 15, 2020, we opened 50 net new stores. In the comparable prior year period, we opened 39 net new stores. Investing cash flows were impacted by our wholly owned captive, which purchased $56.3 million and sold $70.8 million in marketable debt securities during the twenty-four weeks ended February 15, 2020. During the comparable prior year period, the captive purchased $21.1 million in marketable debt securities and sold $34.5 million in marketable debt securities.

Our net cash flows used in financing activities for the twenty-four weeks ended February 15, 2020 were $502.8 million compared to $661.5 million in the comparable prior year period. For the twenty-four week period ended February 15, 2020, our commercial paper activity resulted in $242.7 million in net proceeds from commercial paper, as compared to $103.5 million of net proceeds from commercial paper in the comparable prior year period. Stock repurchases were $764.8 million in the current twenty-four week period as compared with $847.1 million in the comparable prior year period. For the twenty-four weeks ended February 15, 2020, proceeds from the sale of common stock and exercises of stock options provided $48.7 million. In the comparable prior year period, proceeds from the sale of common stock and exercises of stock options provided $107.6 million.

During fiscal 2020, we expect to increase the investment in our business as compared to fiscal 2019. Our investments continue to be directed primarily to new stores, supply chain infrastructure, investments in technology and enhancements to existing stores. The amount of our investments in our new stores is impacted by different factors, including such factors as whether the building and land are purchased (requiring higher investment) or leased (generally lower investment), located in the U.S., Mexico or Brazil, or located in urban or rural areas.

In addition to the building and land costs, our new stores require working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio. We plan to continue leveraging our inventory purchases; however, our ability to do so may be limited by our vendors’ capacity to factor their receivables from us. Certain vendors participate in financing arrangements with financial institutions whereby they factor their receivables from us, allowing them to receive payment on our invoices at a discounted rate. Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio. Accounts payable, as a percentage of gross inventory, was 105.7% at February 15, 2020, compared to 108.5% at February 9, 2019.

Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance may be funded through new borrowings. We anticipate that we will be able to obtain such financing in view of our current credit ratings and favorable experiences in the debt markets in the past.

For the trailing four quarters ended February 15, 2020, our adjusted

after-tax

return on invested capital (“ROIC”) was 35.3% as compared to 33.5% for the comparable prior year period. We use adjusted ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance. Refer to the “Reconciliation of

Non-GAAP

Financial Measures” section for further details of our calculation.

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Debt Facilities

We entered into a Master Extension, New Commitment and Amendment Agreement dated as of November 18, 2017 (the “Extension Amendment”) to the Third Amended and Restated Credit Agreement dated as of November 18, 2016, as amended, modified, extended or restated from time to time (the “Revolving Credit Agreement”). Under the Extension Amendment: (i) our borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion; (ii) our option to increase the borrowing capacity under the Revolving Credit Agreement was “refreshed” and the amount of such option remained at $400 million; (iii) the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from $2.0 billion to $2.4 billion; (iv) the termination date of the Revolving Credit Agreement was extended from November 18, 2021 until November 18, 2022; and (v) we have the option to make one additional written request of the lenders to extend the termination date then in effect for an additional year. Under the Revolving Credit Agreement, we may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon our senior, unsecured,

(non-credit

enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the Revolving Credit Agreement. As of February 15, 2020, we had $3.2 million of outstanding letters of credit under the Revolving Credit Agreement.

We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of $25 million. The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement. As of February 15, 2020, we had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires in June 2022.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had $219.4 million in letters of credit outstanding as of February 15, 2020. These letters of credit have various maturity dates and were issued on an uncommitted basis.

All senior notes are subject to an interest rate adjustment if the debt ratings assigned to the senior notes are downgraded (as defined in the agreements). Further, the senior notes contain a provision that repayment of the senior notes may be accelerated if we experience a change in control (as defined in the agreements). Our borrowings under our senior notes contain minimal covenants, primarily restrictions on liens. Under our revolving credit facilities, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances. All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default occurs. As of February 15, 2020, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

As of February 15, 2020, the $1.273 billion of commercial paper borrowings and the $500 million 4.000% Senior Notes due November 2020 were classified as long-term in the Consolidated Balance Sheets as we had the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit facilities. As of February 15, 2020, we had $1.997 billion of availability under our $2.0 billion revolving credit facility, which would allow us to replace these short-term obligations with long-term financing facilities.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, and rent (“EBITDAR”) ratio was 2.6:1 as of February 15, 2020 and was 2.5:1 as of February 9, 2019. We calculate adjusted debt as the sum of total debt, finance lease liabilities and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent, share-based expense and pension termination charges to net income. Adjusted debt to EBITDAR is calculated on a trailing four quarter basis. We target our debt levels to a ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings. We believe this is important information for the management of our debt levels. To the extent EBITDAR continues to grow in future years, we expect our debt levels to increase; conversely, if EBITDAR declines, we would expect our debt levels to decrease. Refer to the “Reconciliation of

Non-GAAP

Financial Measures” section for further details of our calculation.

Stock Repurchases

From January 1, 1998 to February 15, 2020, we have repurchased a total of 147.5 million shares of our common stock at an aggregate cost of $22.188 billion, including 669,967 shares of our common stock at an aggregate cost of $764.8 million during the twenty-four week period ended February 15, 2020. On October 7, 2019, the Board voted to increase the authorization by $1.25 billion. This raised the total value of shares authorized to be repurchased to $23.15 billion. Considering cumulative repurchases as of February 15, 2020, we had $961.9 million remaining under the Board’s authorization to repurchase our common stock.

Subsequent to February 15, 2020, we have repurchased 156,035 shares of our common stock at an aggregate cost of $166.1 million.

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Off-Balance

Sheet Arrangements

Since our fiscal year end, we have cancelled, issued and modified

stand-by

letters of credit that are primarily renewed on an annual basis to cover deductible payments to our casualty insurance carriers. Our total

stand-by

letters of credit commitment at February 15, 2020, was $247.6 million, compared with $101.2 million at August 31, 2019, and our total surety bonds commitment at February 15, 2020, was $42.2 million, compared with $36.7 million at August 31, 2019.

Financial Commitments

As of February 15, 2020, there were no significant changes to our contractual obligations as described in our Annual Report on Form

10-K

for the year ended August 31, 2019.

Reconciliation of

Non-GAAP

Financial Measures

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain financial measures not derived in accordance with GAAP. These

non-GAAP

financial measures provide additional information for determining our optimal capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders’ value.

Non-GAAP

financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented

non-GAAP

financial measures, as we believe they provide additional information that is useful to investors. Furthermore, our management and the Compensation Committee of the Board use the above mentioned

non-GAAP

financial measures to analyze and compare our underlying operating results and to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables.

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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 February 15, 2020 and February 9, 2019.


	A			B			A-B=C			D			C+D

(in thousands, except percentage)	Fiscal Year Ended August 31, 2019 (1)			Twenty-Four Weeks Ended February 9, 2019			Twenty-Nine Weeks Ended August 31, 2019			Twenty-Four Weeks Ended February 15, 2020			Trailing Four Quarters Ended February 15, 2020

Net income	$	1,617,221		$	646,044		$	971,177		$	649,620		$	1,620,797
Adjustments:
Interest expense		184,804			80,369			104,435			88,078			192,513
Rent expense		332,726			144,360			188,366			150,751			339,117
Tax effect (2)		(107,129	)		(46,519	)		(60,610	)		(49,438	)		(110,048	)
Deferred tax liabilities, net of repatriation tax		(6,340	)		(6,340	)		–			–			–

Adjusted after-tax return	$	2,021,282		$	817,914		$	1,203,368		$	839,011		$	2,042,379

Average debt (3)													$	5,241,651
Average stockholders’ deficit (3)														(1,676,987	)
Add : Rent x 6 (4)														2,034,702
Average finance lease liabilities (3)														178,416

Invested capital													$	5,777,782

Adjusted after-tax ROIC														35.3%


	A			B			A-B=C			D			C+D

(in thousands, except percentage)	Fiscal Year Ended August 25, 2018			Twenty-Four Weeks Ended February 10, 2018			Twenty-Eight Weeks Ended August 25, 2018			Twenty-Four Weeks Ended February 9, 2019			Trailing Four Quarters Ended February 9, 2019

Net income	$	1,337,536		$	570,533		$	767,003		$	646,044		$	1,413,047
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			78,229			96,298			80,369			176,667
Rent expense		315,580			142,712			172,868			144,360			317,228
Tax effect (2)		(211,806	)		(112,656	)		(99,150	)		(52,861	)		(152,011	)
Deferred tax liabilities, net of repatriation tax		(132,113	)		(136,679	)		4,566			(6,340	)		(1,774	)

Adjusted after-tax return	$	1,807,149		$	735,301		$	1,071,848		$	811,572		$	1,883,420

Average debt (3)													$	5,054,281
Average stockholders’ deficit (3)														(1,493,097	)
Add: Rent x 6														1,903,368
Average finance lease liabilities (3)														156,840

Invested capital													$	5,621,392

Adjusted after-tax ROIC														33.5%

(1)	The fiscal year ended August 31, 2019 consists of 53 weeks.

(2)	Effective tax rate over trailing four quarters ended February 15, 2020 is 20.7% . Effective tax rate over trailing four quarters ended February 9, 2019 is 28.1% for pension termination and 23.5% for interest and rent expense.

(3)	All averages are computed based on trailing 5 quarter balances.

(4)

Effective September 1, 2019, the Company adopted ASU

2016-02,

Leases (Topic 842), the new lease accounting standard that required the Company to recognize operating lease assets and liabilities in the balance sheet. The table below outlines the calculation of rent expense and reconciles rent expense to total lease cost, per ASC 842, the most directly comparable GAAP financial measure, for the twenty-four weeks ended February 15, 2020.


Total lease cost per ASC 842, for the 24 weeks ended February 15, 2020	$	190,390
Less: Finance lease interest and amortization		(28,195	)
Less: Variable operating lease components, related to insurance and common area maintenance for the 24 weeks ended February 15, 2020		(11,444	)

Rent expense for the 24 weeks ended February 15, 2020		150,751
Add: Rent expense for the 29 weeks ended August 31, 2019, as previously reported prior to the adoption of ASC 842		188,366

Rent expense for the 53 weeks ended February 15, 2020	$	339,117

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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 February 15, 2020 and February 9, 2019.


	A		B		A-B=C		D		C+D

(in thousands, except ratio)	Fiscal Year Ended August 31, 2019		Twenty-Four Weeks Ended February 9, 2019		Twenty-Nine Weeks Ended August 31, 2019		Twenty-Four Weeks Ended February 15, 2020		Trailing Four Quarters Ended February 15, 2020

Net income	$	1,617,221	$	646,044	$	971,177	$	649,620	$	1,620,797
Add: Interest expense		184,804		80,369		104,435		88,078		192,513
Income tax expense		414,112		161,426		252,686		170,263		422,949

Adjusted EBIT		2,216,137		887,839		1,328,298		907,961		2,236,259
Add: Depreciation expense		369,957		166,230		203,727		180,420		384,147
Rent expense		332,726		144,360		188,366		150,751		339,117
Share-based expense		43,255		21,558		21,697		22,107		43,804

Adjusted EBITDAR	$	2,962,075	$	1,219,987	$	1,742,088	$	1,261,239	$	3,003,327


Debt									$	5,451,471
Finance lease liabilities										196,047
Add: Rent x 6 (1)										2,034,702

Adjusted debt									$	7,682,220

Adjusted debt to EBITDAR										2.6


	A		B		A-B=C		D		C+D

(in thousands, except ratio)	Fiscal Year Ended August 25, 2018		Twenty-Four Weeks Ended February 10, 2018		Twenty-Eight Weeks Ended August 25, 2018		Twenty-Four Weeks Ended February 9, 2019		Trailing Four Quarters Ended February 9, 2019

Net income	$	1,337,536	$	570,533	$	767,003	$	646,044	$	1,413,047
Add: Impairment before tax impact		193,162		193,162		–		–		–
Pension termination charges before tax impact		130,263		–		130,263		–		130,263
Interest expense		174,527		78,229		96,298		80,369		176,667
Income tax expense		298,793		25,090		273,703		161,426		435,129

Adjusted EBIT		2,134,281		867,014		1,267,267		887,839		2,155,106
Add: Depreciation expense		345,084		157,337		187,747		166,230		353,977
Rent expense		315,580		142,712		172,868		144,360		317,228
Share-based expense		43,674		23,764		19,910		21,558		41,468

Adjusted EBITDAR	$	2,838,619	$	1,190,827	$	1,647,792	$	1,219,987	$	2,867,779


Debt									$	5,111,201
Finance lease liabilities										154,923
Add: Rent x 6										1,903,368

Adjusted debt									$	7,169,492

Adjusted debt to EBITDAR										2.5

(1)

Effective September 1, 2019, the Company adopted ASU

2016-02,


Total lease cost per ASC 842, for the 24 weeks ended February 15, 2020	$	190,390
Less: Finance lease interest and amortization		(28,195	)
Less: Variable operating lease components, related to insurance and common area maintenance for the 24 weeks ended February 15, 2020		(11,444	)

Rent expense for the 24 weeks ended February 15, 2020		150,751
Add: Rent expense for the 29 weeks ended August 31, 2019, as previously reported prior to the adoption of ASC 842		188,366

Rent expense for the 53 weeks ended February 15, 2020	$	339,117

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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.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

At February 15, 2020, the only material change to our instruments and positions that are sensitive to market risk since the disclosures in our 2019 Annual Report to Stockholders was the $242.7 million net increase in commercial paper.

The fair value of our debt was estimated at $5.678 billion as of February 15, 2020 and $5.419 billion as of August 31, 2019, based on the quoted market prices for the same or similar debt issues or on the current rates available to AutoZone for debt of the same terms. Such fair value was greater than the carrying value of debt by $226.6 million at February 15, 2020 and greater than the carrying value by $212.7 million at August 31, 2019. We had $1.273 billion of variable rate debt outstanding at February 15, 2020 and $1.030 billion of variable rate debt outstanding at August 31, 2019. At these borrowing levels for variable rate debt, a one percentage point increase in interest rates would have had an unfavorable annual impact on our

pre-tax

earnings and cash flows of $12.7 million in fiscal 2020. The primary interest rate exposure on variable rate debt is based on LIBOR. We had outstanding fixed rate debt of $4.179 billion, net of unamortized debt issuance costs of $21.2 million at February 15, 2020 and $4.176 billion, net of unamortized debt issuance costs of $23.7 million at August 31, 2019. A one percentage point increase in interest rates would reduce the fair value of our fixed rate debt by $175.9 million at February 15, 2020.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of February 15, 2020, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules

13a-15(e)

and

15d-15(e)

under the Exchange Act, as amended. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of February 15, 2020.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the quarter ended February 15, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In 2004, we acquired a store site in Mount Ephraim, New Jersey that had previously been the site of a gasoline service station and contained evidence of groundwater contamination. Upon acquisition, we voluntarily reported the groundwater contamination issue to the New Jersey Department of Environmental Protection (“NJDEP”) and entered into a Voluntary Remediation Agreement providing for the remediation of the contamination associated with the property. We have conducted and paid for (at an immaterial cost to us) remediation of contamination on the property.

We have also voluntarily investigated and addressed potential vapor intrusion impacts in downgradient residences and businesses. The NJDEP has asserted, in a Directive and Notice to Insurers dated February 19, 2013 and again in an Amended Directive and Notice to Insurers dated January 13, 2014 (collectively the “Directives”), that we are liable for the downgradient impacts under a joint and severable liability theory. By letter dated April 23, 2015, NJDEP has demanded payment from us, and other parties, in the amount of approximately $296 thousand for costs incurred by NJDEP in connection with contamination downgradient of the property. By letter dated January 29, 2016, we were informed that NJDEP has filed a lien against the property in connection with approximately $355 thousand in costs incurred by NJDEP in connection with contamination downgradient of the property. We have contested, and will continue to contest, any such assertions due to the existence of other entities/sources of contamination, some of which are named in the Directives and the April 23, 2015 Demand, in the area of the property.

Pursuant to the Voluntary Remediation Agreement, upon completion of all remediation required by the agreement, we believe we should be eligible to be reimbursed up to 75% of qualified remediation costs by the State of New Jersey. We have asked the state for clarification that the agreement applies to

off-site

work. Although the aggregate amount of additional costs that we may incur pursuant to the remediation cannot currently be ascertained, we do not currently believe that fulfillment of our obligations under the agreement or otherwise will result in costs that are material to the Company’s Condensed Consolidated Statement of Income, Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Cash Flows.

We are involved in various other legal proceedings incidental to the conduct of our business, including, but not limited to, several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices. We do not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets or Condensed Consolidated Statements of Cash Flows.

Item 1A.

Risk Factors

As of the date of this filing, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form

10-K

for the fiscal year ended August 31, 2019.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Shares of common stock repurchased by the Company during the quarter ended February 15, 2020 were as follows:

Issuer Repurchases of Equity Securities


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs
November 24, 2019 to December 21, 2019		101,815	$	1,178.58		101,815	$	1,156,796,693
December 22, 2019 to January 18, 2020		165,045		1,180.58		165,045		961,947,076
January 19, 2020 to February 15, 2020		–		–		–		961,947,076

Total		266,860	$	1,179.82		266,860	$	961,947,076

During 1998, we announced a program permitting us to repurchase a portion of our outstanding shares not to exceed a dollar maximum established by our Board of Directors. This program was most recently amended on October 7, 2019 to increase the repurchase authorization by $1.25 billion. This brings the total value of shares to be repurchased to $23.15 billion. All of the above repurchases were part of this program. Subsequent to February 15, 2020, we have repurchased 156,035 shares of our common stock at an aggregate cost of $166.1 million.

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Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

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Item 6.

Exhibits

The following exhibits are being filed herewith:



	3.1			Restated Articles of Incorporation of AutoZone, Inc. incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended February 13, 1999.

	3.2			Seventh Amended and Restated By-Laws of AutoZone, Inc. incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K dated March 19, 2018.

	15.1			Letter Regarding Unaudited Interim Financial Statements.

	31.1			Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1*			Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2*			Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	101. INS			Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

	101.SCH			Inline XBRL Taxonomy Extension Schema Document

	101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document

	101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document

	104.			The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended February 15, 2020, has been formatted in Inline XBRL.

* Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AUTOZONE, INC.

By:

/s/ WILLIAM T. GILES

William T. Giles

Chief Financial Officer and Executive Vice President

Finance, Information Technology and Store Development

(Principal Financial Officer)

By:

/s/ CHARLIE PLEAS, III

Charlie Pleas, III

Senior Vice President, Controller

(Principal Accounting Officer)

Dated: March 17, 2020