What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-06-12 compared with 2020-03-17 · 136 added, 143 removed, 156 unchanged (64% of the section changed)

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(“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.

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.

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war and the prospect of war, including terrorist activity;

the impact of public health issues, such as the recent global pandemic of a novel strain of the coronavirus (“COVID-19”);

the ability to hire, train and retain qualified employees;

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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.

Certain of these risks and uncertainties are discussed in more detail in the “Risk Factors” section contained in Item 1A under Part 1 of our Annual Report on Form 10-K for the year ended August 31, 2019, and in Item 1A under Part 2 of this Quarterly Report on Form 10-Q, and these Risk Factors should be read carefully.

Forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the “Risk Factors” could materially and adversely affect our business.

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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

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 began operations in 1979 and at May 9, 2020, operated 5,836 stores in the U.S., 610 stores in Mexico and 38 stores in Brazil.

At May 9, 2020, in 4,950 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts.

We also have commercial programs in stores in Mexico and Brazil.

We also sell the ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com.

Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive

products through www.autozone.com and our commercial customers can make purchases through www.autozonepro.com.

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.

Operating results for the twelve and thirty-six weeks ended May 9, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending August 29, 2020.

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks.

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Our business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September and the lowest sales generally occurring in the months of December and January.

COVID-19 Impact

The outbreak of a novel strain of the coronavirus (“COVID-19”), which was declared a global pandemic on March 11, 2020 by the World Health Organization, has led to adverse impacts on the national and global economy.

We have been able to keep our stores open and operating in the U.S.

Initially, we reduced the hours of operation in most of our stores, but subsequently have returned to more normal operating hours.

We have also taken numerous measures to ensure the health, safety and well-being of our customers and employees.

We provided new Emergency Time-Off benefit enhancements for both full-time and part-time eligible hourly employees in the U.S.

and Puerto Rico.

We invested in supplies for the protection of our employees and customers, increased the frequency of cleaning and disinfecting, and introduced new service options for customers, such as curbside pickup, among other things.

These expanded benefits, supply costs and other COVID-19 related costs resulted in approximately $75 million of expense included in Operating, selling, general and administrative expenses in the Condensed Consolidated Statements of Income for the twelve weeks ended and thirty-six weeks ended May 9, 2020.

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

While sales were initially negatively impacted, they have since increased.

However, we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities intended to minimize the spread of the pandemic or to stimulate the economy and other unintended consequences.

Accordingly, continued business disruption relating to the COVID-19 outbreak may cause significant fluctuations in our business, may negatively impact demand for our products, our store hours and our workforce availability and may also magnify risks associated with sourcing quality merchandise domestically and outside the U.S.

at favorable prices, all of which would adversely impact our business and results of operations.

Executive Summary

Net sales 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.

Net sales decreased 0.1% for the quarter driven by the impact of the COVID-19 crisis which led to a decrease in domestic same store sales (sales from stores open at least one year) of 1.0%.

Domestic commercial sales decreased 6.7%, which represents 20.6% of our total sales.

Operating profit decreased 10.2% to $491.7 million compared to $547.5 million in the same period last year, while net income for the quarter decreased 15.5% over the same period last year to $342.9 million compared to $405.9 million in the same period last year.

Diluted earnings per share decreased 10.0% to $14.39 per share from $15.99 per share in the comparable prior year period.

Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to fuel costs, wage rates and other economic conditions.

Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.

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.

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.

During the third quarter of fiscal 2020, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 83% of total sales with discretionary making up the remaining, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix.

We did not experience any fundamental shifts in our category sales mix as compared to the previous year.

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The two statistics we believe have the most positive correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road.

While over the long-term we have seen a positive correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven.

During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including the number of seven year old or older vehicles on the road.

The average age of the U.S.

light vehicle fleet continues to trend in our industry’s favor.

According to the latest data provided by the Auto Care Association as of January 1, 2019, for the 8 th

consecutive year, the average age of vehicles on the road has exceeded 11 years.

Since the beginning of the fiscal year and through November 2019 (latest publicly available information), miles driven in the U.S.

have been essentially flat.

Twelve Weeks Ended February 15, 2020

Compared with Twelve Weeks Ended February 9, 2019

Net sales for the twelve weeks ended February 15, 2020 increased $63.1 million to $2.514 billion, or 2.6%, over net sales of $2.451 billion for the comparable prior year period.

Total auto parts sales increased by 2.6%, primarily driven by net sales of $56.5 million from new stores, partially offset by a decrease in domestic same store sales of (0.8%).

Domestic commercial sales increased $42.3 million, or 8.2%, to $556.9 million over the comparable prior year period.

Gross profit for the twelve weeks ended February 15, 2020 was $1.366 billion, compared with $1.325 billion during the comparable prior year period.

Gross profit, as a percentage of sales was 54.3% compared to 54.1% during the comparable prior year period.

The increase in gross margin was primarily driven by supply chain leverage.

Operating, selling, general and administrative expenses for the twelve weeks ended February 15, 2020 were $958.1 million, or 38.1% of net sales, compared with $925.1 million, or 37.7% of net sales during the comparable prior year period.

Operating expenses, as a percentage of sales, were higher than last year with deleverage primarily driven by domestic store payroll.

Net interest expense for the twelve weeks ended February 15, 2020 was $44.3 million compared with $41.4 million during the comparable prior year period.

The increase was primarily due to an increase in average borrowing levels over the comparable prior year period.

Average borrowings for the twelve weeks ended February 15, 2020 were $5.464 billion, compared with $5.119 billion for the comparable prior year period.

Weighted average borrowing rates were 3.0% for the twelve weeks ended February 15, 2020 and 3.1% for the twelve weeks ended February 9, 2019.

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

Net income for the twelve week period ended February 15, 2020 increased by $4.6 million to $299.3 million due to the factors set forth above, and diluted earnings per share increased by 7.8% to $12.39 from $11.49 in the comparable prior year period.

According to the latest data provided by the Auto Care Association as of January 1, 2019, for the 8th consecutive year, the average age of vehicles on the road has exceeded 11 years.

Since the beginning of the fiscal year and through March 2019 (latest publicly available information), miles driven in the U.S.

decreased 3.5%.

Twelve Weeks Ended May 9, 2020

Compared with Twelve Weeks Ended May 4, 2019

Net sales for the twelve weeks ended May 9, 2020 decreased $3.7 million to $2.779 billion, or 0.1% over net sales of $2.783 billion for the comparable prior year period.

Total auto parts sales decreased by 0.3%, primarily driven by a decrease in domestic same store sales of 1.0%, partially offset by net sales of $55.4 million from new stores.

Domestic commercial sales decreased $41.0 million, or 6.7%, to $573.8 million over the comparable prior year period.

Gross profit for the twelve weeks ended May 9, 2020 was $1.491 billion, compared with $1.492 billion during the comparable prior year period.

Gross profit, as a percentage of sales was flat to the comparable prior year period at 53.6%.

Operating, selling, general and administrative expenses for the twelve weeks ended May 9, 2020 were $999.0 million, or 35.9% of net sales, compared with $944.5 million, or 33.9% of net sales during the comparable prior year period.

Operating expenses, as a percentage of sales, were higher than last year with the deleverage primarily driven by the unplanned approximate $75 million of costs incurred in response to COVID-19.

Net interest expense for the twelve weeks ended May 9, 2020 was $47.5 million compared with $43.2 million during the comparable prior year period.

The increase was primarily due to an increase in average borrowing levels over the comparable prior year period due to the $500 million debt issuance of 3.625% Senior Notes due April 2025 and the $750 million debt issuance of 4.000% Senior Notes due April 2030 as well as an increase in borrowing rates.

Average borrowings for the twelve weeks ended May 9, 2020 were $5.460 billion, compared with $5.191 billion for the comparable prior year period.

Weighted average borrowing rates were 3.4% for the twelve weeks ended May 9, 2020 and 3.2% for the twelve weeks ended May 4, 2019.

Our effective income tax rate was 22.8% of pretax income for the twelve weeks ended May 9, 2020, and 19.5% for the comparable prior year period.

The increase in the tax rate was primarily attributable to a reduced benefit from stock options exercised during the twelve weeks ended May 9, 2020 compared to the comparable prior year period.

The benefit of stock options exercised for the twelve weeks ended May 9, 2020 was $1.1 million compared to $13.1 million in the comparable prior year period.

Net income for the twelve week period ended May 9, 2020 decreased by $63.1 million to $342.9 million due to the factors set forth above, and diluted earnings per share decreased by 10.0% to $14.39 from $15.99 in the comparable prior year period.

The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $0.71.

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.

Thirty-Six Weeks Ended May 9, 2020

Compared with Thirty-Six Weeks Ended May 4, 2019

Net sales for the thirty-six weeks ended May 9, 2020 increased $210.7 million to $8.086 billion, or 2.7%, over net sales of $7.875 billion for the comparable prior year period.

Total auto parts sales increased by 2.6%, primarily driven by net sales of $167.6 million from new stores and an increase in domestic same store sales of 0.5%.

Domestic commercial sales increased $75.9 million, or 4.5%, to $1.752 billion over the comparable prior year period.

Gross profit for the 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.

Gross profit for the thirty-six weeks ended May 9, 2020 was $4.358 billion, or 53.9% of net sales, compared with $4.235 billion, or 53.8% of net sales, during the comparable prior year period.

The increase in gross margin was primarily driven by supply chain leverage.

Operating, selling, general and administrative expenses for the 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.

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.

Operating, selling, general and administrative expenses for the thirty-six weeks ended May 9, 2020 were $2.958 billion, or 36.6% of net sales, compared with $2.799 billion, or 35.5% of net sales.

Deleverage was primarily driven by the unplanned approximate $75 million of costs incurred in response to COVID-19.

Net interest expense for the thirty-six weeks ended May 9, 2020 was $135.5 million compared with $123.6 million during the comparable prior year period.

The increase was primarily due to an increase in average borrowing levels over the comparable prior year period due to the issuance of new Senior debt during the current quarter, as well as an increase in borrowing rates.

Average borrowings for the thirty-six weeks ended May 9, 2020 were $5.371 billion, compared with $5.094 billion for the comparable prior year period.

Weighted average borrowing rates were 3.2% for the thirty-six week period ended May 9, 2020 and 3.1% for the thirty-six week period ended May 4, 2019.

Our effective income tax rate was 21.5% of pretax income for the thirty-six weeks ended May 9, 2020, and 19.8% for the comparable prior year period.

The increase in the tax rate was primarily attributable to a reduced benefit from stock options exercised during the thirty-six weeks ended May 9, 2020 compared to the comparable prior year period.

The benefit of stock options exercised for the thirty-six week period ended May 9, 2020 was $17.6 million compared to $38.2 million in the comparable prior year period.

Net income for the thirty-six week period ended May 9, 2020 decreased by $59.5 million to $992.5 million due to the factors set forth above, and diluted earnings per share increased by 0.4% to $41.08 from $40.92 in the comparable prior year period.

The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $1.45.

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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.

For the thirty-six weeks ended May 9, 2020, our net cash flows from operating activities provided $1.303 billion as compared with $1.287 billion provided during the comparable prior year period.

The increase is primarily due to favorable changes in accounts receivable.

Our net cash flows used in investing activities for the thirty-six weeks ended May 9, 2020 were $247.9 million as compared with $285.3 million in the comparable prior year period.

Capital expenditures for the thirty-six weeks ended May 9, 2020 were $273.9 million compared to $313.8 million for the comparable prior year period.

The decrease is primarily driven by the timing of store openings in fiscal 2020 compared to the comparable prior year period.

During the thirty-six week period ended May 9, 2020, we opened 73 net new stores.

In the comparable prior year period, we opened 85 net new stores.

Investing cash flows were impacted by our wholly owned captive, which purchased $56.3 million and sold $70.8 million in marketable debt securities during the twenty-four weeks ended February 15, 2020.

Investing cash flows were impacted by our wholly owned captive, which purchased $82.5 million and sold $106.7 million in marketable debt securities during the thirty-six weeks ended May 9, 2020.

During the comparable prior year period, the captive purchased $38.9 million in marketable debt securities and sold $61.1 million in marketable debt securities.

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.

Our net cash flows used in financing activities for the thirty-six weeks ended May 9, 2020 were $712.2 million compared to $1.043 billion in the comparable prior year period.

During the thirty-six weeks ended May 9, 2020, we received $500 million from the debt issuance of 3.625% Senior Notes due April 2025 and received $750 million from the debt issuance of 4.000% Senior Notes due April 2030.

During the comparable prior year period, we received $750 million from the issuance of debt and repaid our $250 million 1.625% Senior Notes due April 2019 using a portion of the $750 million Senior Notes issued in April 2019.

For the thirty-six week period ended May 9, 2020, our commercial paper activity resulted in $1.030 billion net repayments from commercial paper, as compared to $348.5 million of net repayments from commercial paper in the comparable prior year period.

Stock repurchases were $930.9 million in the current thirty-six week period as compared with $1.313 billion in the comparable prior year period.

For the thirty-six weeks ended May 9, 2020, proceeds from the sale of common stock and exercises of stock options provided $56.3 million.

In the comparable prior year period, proceeds from the sale of common stock and exercises of stock options provided $164.9 million.

During fiscal 2020, we expect to 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.

During fiscal 2020, we expect to decrease the investment in our business as compared to fiscal 2019 due to the impact of COVID-19.

Our investments continue to be directed primarily to new stores, supply chain infrastructure, technology and enhancements to existing stores.

The amount of our investments in our new stores is impacted by different factors, including such factors as whether the building and land are purchased (requiring higher investment) or leased (generally lower investment), located in the U.S., Mexico or Brazil, or located in urban or rural areas.

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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.

Accounts payable, as a percentage of gross inventory, was 108.2% at May 9, 2020, compared to 108.5% at May 4, 2019.

Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases.

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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.

For the trailing four quarters ended May 9, 2020, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP number, was 34.0% as compared to 34.5% for the comparable prior year period.

We use adjusted ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance.

Refer to the “Reconciliation of Non-GAAP

Financial Measures” section for further details of our calculation.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.

Debt Facilities

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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.

On April 3, 2020, we entered into a 364-Day Credit Agreement (the “364-Day Credit Agreement”) to augment our access to liquidity due to current macroeconomic conditions and supplements our existing Revolving Credit Agreement.

The 364-Day Credit Agreement provides for loans in the aggregate principal amount of up to $750 million.

The 364-Day Credit Agreement will terminate, and all amounts borrowed under the 364-Day Credit Agreement will be due and payable, on April 2, 2021.

Revolving loans under the 364-Day Credit Agreement may be base rate loans, Eurodollar loans, or a combination of both, at our election.

As of May 9, 2020, we had no outstanding borrowings under each of our revolving credit facilities and $3.2 million of outstanding letters of credit under the Revolving Credit Agreement.

We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of $25 million.

The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement.

As of 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.

As of May 9, 2020, we had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires in June 2022.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had $218.8 million in letters of credit outstanding as of May 9, 2020.

These letters of credit have various maturity dates and were issued on an uncommitted basis.

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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.

As of May 9, 2020, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

As of May 9, 2020, the $500 million 4.000% Senior Notes due November 2020 and the $250 million 2.500% Senior Notes due April 2021 were classified as long-term in the Consolidated Balance Sheets as we had the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit facilities.

As of May 9, 2020, we had $2.747 billion of availability under our $2.750 billion revolving credit facilities which would allow us to replace these short-term obligations with long-term financing facilities.

On March 30, 2020, we issued $500 million in 3.625% Senior Notes due April 2025 and $750 million in 4.000% Senior Notes due April 2030 under our automatic shelf registration statement on Form S-3, filed with the SEC on April 4, 2019 (File No.

333-230719) (the “2019 Shelf Registration”).

The 2019 Shelf Registration allows us to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions.

Proceeds from the debt issuance were used for general corporate purposes.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, and rent (“EBITDAR”) ratio was 2.6:1 as of May 9, 2020 and was 2.5:1 as of May 4, 2019.

We calculate adjusted debt as the sum of total debt, finance lease liabilities and rent times six;

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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.

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.

From January 1, 1998 to May 9, 2020, we have repurchased a total of 147.7 million shares of our common stock at an aggregate cost of $22.354 billion, including 826,002 shares of our common stock at an aggregate cost of $930.9 million during the thirty-six week period ended May 9, 2020.

On October 7, 2019, the Board voted to increase the authorization by $1.25 billion.

This raised the total value of shares authorized to be repurchased to $23.15 billion.

Considering cumulative repurchases as of 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.

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.

Considering cumulative repurchases as of May 9, 2020, we had $795.9 million remaining under the Board’s authorization to repurchase our common stock.

During the twelve week period ended May 9, 2020, we temporarily ceased share repurchases under our share repurchase program to conserve liquidity in response to the uncertainty related to COVID-19, and we will continue to evaluate current and expected business conditions and resume share repurchases under our share repurchase program when we deem appropriate.

Off-Balance Sheet Arrangements

Since our fiscal year end, we have cancelled, issued and modified stand-by letters of credit that are primarily renewed on an annual basis to cover deductible payments to our casualty insurance carriers.

Our total stand-by letters of credit commitment at May 9, 2020, was $247.0 million, compared with $101.2 million at August 31, 2019, and our total surety bonds commitment at May 9, 2020, was $41.5 million, compared with $36.7 million at August 31, 2019.

Financial Commitments

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

Except for the previously discussed 364-Day Credit Agreement and debt issuances, as of May 9, 2020, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 31, 2019.

Reconciliation of Non-GAAP Financial Measures

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

These non-GAAP

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

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.

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.

Reconciliation of Non-GAAP

Financial Measure:

Adjusted After-Tax

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended February 15, 2020 and February 9, 2019.

(in thousands, except percentage)

Reconciliation of Non-GAAP Financial Measure:

Adjusted After-Tax ROIC

Trailing Four

Quarters Ended

(in thousands, except percentages)

Interest expense

Rent expense (2)

Tax effect (3)

Deferred tax liabilities, net of repatriation tax

Adjusted after-tax

Adjusted after-tax return

Average debt (4)

2 unchanged sentences

Invested capital

Adjusted after-tax

(in thousands, except percentage)

Adjusted after-tax ROIC

Trailing Four

Quarters Ended

(in thousands, except percentages)

Impairment before tax impact

3 unchanged sentences

Deferred tax liabilities, net of repatriation tax

Adjusted after-tax

Adjusted after-tax return

Average debt (4)

2 unchanged sentences

Invested capital

Adjusted after-tax

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

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.

All averages are computed based on trailing 5 quarter balances.

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

Finance lease interest and amortization

Variable operating lease components, related to insurance and common area maintenance for the 24 weeks ended February 15, 2020

Rent expense for the 24 weeks ended February 15, 2020

Rent expense for the 29 weeks ended August 31, 2019, as previously reported prior to the adoption of ASC 842

Rent expense for the 53 weeks ended February 15, 2020

Adjusted after-tax ROIC

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.

(in thousands, except ratio)

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended May 9, 2020 and May 4, 2019.

Trailing Four

Quarters Ended

(in thousands, except ratio)

Interest expense

2 unchanged sentences

Depreciation expense

Rent expense (2)

Share-based expense

3 unchanged sentences

Adjusted debt to EBITDAR

(in thousands, except ratio)

Trailing Four

Quarters Ended

(in thousands, except ratio)

Impairment before tax impact

9 unchanged sentences

Adjusted debt to EBITDAR

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.

Total lease cost per ASC 842, for the 24 weeks ended February 15, 2020

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

(2) 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.

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

Finance lease interest and amortization

Variable operating lease components, related to insurance and common area maintenance for the 24 weeks ended February 15, 2020

Rent expense for the 24 weeks ended February 15, 2020

Variable operating lease components, related to insurance and common area maintenance for the 36 weeks ended May 9, 2020

Rent expense for the 36 weeks ended May 9, 2020

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

Rent expense for the 53 weeks ended February 15, 2020

Rent expense for the 53 weeks ended May 9, 2020

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

Effective tax rate over trailing four quarters ended May 4, 2019 is 28.1% for pension termination and 21.6% for interest and rent expense.

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

Recent Accounting Pronouncements

4 unchanged sentences

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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis