What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-18 compared with 2020-06-12 · 128 added, 145 removed, 147 unchanged (65% of the section changed)

16 unchanged sentences

changes in laws or regulations;

risks associated with self -insurance;

war and the prospect of war, including terrorist activity;

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

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

the ability to hire, train and retain qualified employees;

11 unchanged sentences

and business interruptions.

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

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

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 29, 2020, and these Risk Factors should be read carefully.

Forward-looking statements are not guarantees of future performance, 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.

However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward-looking statements.

Forward-looking statements speak only as of the date made.

Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual results may materially differ from anticipated results.

We are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in the Americas.

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

We began operations in 1979 and at November 21, 2020, operated 5,924 stores in the U.S., 621 stores in Mexico and 45 stores in Brazil.

Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

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

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

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

At November 21, 2020, in 5,043 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 all stores in Mexico and Brazil.

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

Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com and our commercial customers can make purchases through www.autozonepro.com.

1 unchanged sentence

We do not derive revenue from automotive repair or installation services.

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.

Operating results for the twelve weeks ended November 21, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2021.

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.

The fourth quarters of fiscal 2021 and 2020 each have 16 weeks.

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

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.

In the first quarter of fiscal 2021, the COVID-19 pandemic has continued to impact our business.

While our sales remain at an elevated level compared to sales prior to the pandemic, we have seen a deceleration in sales growth rates throughout this quarter as we get further away from the pandemic-related government stimulus, which we believe benefitted many of our customers and normal seasonality.

Our main priority continues to be the health, safety and well-being of our customers and employees.

We continue to invest in supplies for the protection of our employees and customers, continue the increased frequency of cleaning and disinfecting our stores and require masks when entering our facilities.

Our current operating expenses reflect the increased costs associated with personal protective equipment and more frequent cleaning of our stores, which we expect to continue for the duration of the pandemic.

Additionally, on December 8, 2020, we announced that we are providing additional Emergency Time-Off (“ETO”) benefit enhancements for both full and part-time eligible employees in the U.S.

along with extending the carryover of unused ETO and normal vacation benefits that will be recognized as an expense of approximately $50 million in our second quarter of fiscal 2021.

The long-term impact to our business remains unknown as we are unable to accurately predict the impact COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the efficacy of a vaccine, the likelihood of a resurgence 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 related to the COVID-19 outbreak may continue to cause significant fluctuations in our business, unusually impacting demand for our products, our store hours and our workforce availability and magnify risks associated with our business and operations.

See “Risk Factors—The ongoing outbreak of COVID-19 has been declared a pandemic by the World Health Organization, continues to spread within the United States and many other parts of the world and may have a material adverse effect on our business operations, financial condition, liquidity and cash flow.” in our Annual Report on Form 10-K for additional information.

Executive Summary

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

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

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

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

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

Net sales increased 12.9% for the quarter ended November 21, 2020 compared to the prior year period, which was driven by an increase in domestic same store sales (sales from stores open at least one year) of 12.3%.

Domestic commercial sales increased 11.9% compared to the prior year period, which represents 22.0% of our total sales.

Operating profit increased by 23.0% to $615.2 million compared to $500.0 million in the same period last year.

Net income for the quarter increased by 26.3% to $442.4 million compared to $350.3 million in the same period last year.

Diluted earnings per share increased by 30.1% to $18.61 per share from $14.30 per share in the comparable prior year period.

The increase in net income for the quarter ended November 21, 2020 was driven by strong topline growth.

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, including the effects of, and responses to, COVID-19.

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

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

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

Our sales mix can be impacted by severe or unusual weather over a short-term period.

Over the long-term, we believe the impact of the weather on our sales mix is not significant.

During the first quarter of fiscal 2021, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 84% of total sales, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix.

While we have not experienced any fundamental shifts in our category sales mix as compared to the previous year, in our domestic stores we continue to experience a slight increase in mix of sales of the discretionary category as compared to previous quarters.

We believe the improvement in this sales category continues to benefit from the pandemic as many of our customers spent more time and money to work on projects.

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

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

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

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

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

The average age of the U.S.

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

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

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

decreased 3.5%.

Twelve Weeks Ended May 9, 2020

Compared with Twelve Weeks Ended May 4, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thirty-Six Weeks Ended May 9, 2020

Compared with Thirty-Six Weeks Ended May 4, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

According to the latest data provided by the Auto Care Association in the 2021 Auto Care Factbook, for the ninth consecutive year, the average age of vehicles on the road has exceeded 11 years.

Since the beginning of the fiscal year and through September 2020 (latest publicly available information), miles driven in the U.S.

decreased 8.6% compared to the same period in the prior year.

We believe the decrease is a result of the COVID-19 pandemic, but we are unable to predict if the decline does continue, the extent of the impact will have on our business.

Twelve Weeks Ended November 21, 2020

Compared with Twelve Weeks Ended November 23, 2019

Net sales for the twelve weeks ended November 21, 2020 increased $361.2 million to $3.154 billion, or 12.9% over net sales of $2.793 billion for the comparable prior year period.

Total auto parts sales increased by 13.1%, primarily driven by an increase in domestic same store sales of 12.3% and net sales of $41.1 million from new stores.

Domestic commercial sales increased $73.9 million to $695.3 million, or 11.9%, over the comparable prior year period.

Gross profit for the twelve weeks ended November 21, 2020 was $1.676 billion, compared with $1.501 billion during the comparable prior year period.

Gross profit, as a percentage of sales was 53.1% for the twelve weeks ended November 21, 2020 compared to 53.7% during the comparable prior year period.

The decrease in gross profit percent was primarily attributable to one-time COVID-19 pandemic related charges, increased loyalty program participation resulting from increased purchase frequency from existing customers, and a shift in mix.

Operating, selling, general and administrative expenses for the twelve weeks ended November 21, 2020 were $1.060 billion, or 33.6% of net sales, compared with $1.001 billion, or 35.8% of net sales during the comparable prior year period.

The decrease in operating expenses, as a percentage of sales, was primarily due to leverage from higher sales growth.

Net interest expense for the twelve weeks ended November 21, 2020 was $46.2 million compared with $43.7 million during the comparable prior year period.

The increase was primarily due to higher debt levels.

Average borrowings for the twelve weeks ended November 21, 2020 were $5.514 billion, compared with $5.190 billion for the comparable prior year period.

Weighted average borrowing rates were 3.3% and 3.1% for the quarter ended November 21, 2020 and November 23, 2019, respectively.

Our effective income tax rate was 22.2% of pretax income for the twelve weeks ended November 21, 2020, and 23.2% for the comparable prior year period.

The decrease in the tax rate was primarily attributable to a higher benefit from stock options exercised during the twelve weeks ended November 21, 2020 compared to the comparable prior year period.

The benefit of stock options exercised for the twelve weeks ended November 21, 2020 was $7.6 million compared to $1.5 million in the comparable prior year period.

Net income for the twelve week period ended November 21, 2020 increased by $92.1 million to $442.4 million from $350.3 million in the comparable prior year period, and diluted earnings per share increased by 30.1% to $18.61 from $14.30 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 $0.48.

1 unchanged sentence

The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories.

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

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

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

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

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

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

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

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

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

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.

For the twelve weeks ended November 21, 2020, our net cash flows from operating activities provided $683.5 million as compared with $447.1 million provided during the comparable prior year period.

The increase is

primarily due to growth in net income due to accelerated sales growth as a result of the COVID-19 pandemic and the timing of accrued payments.

Our net cash flows used in investing activities for the twelve weeks ended November 21, 2020 were $110.2 million as compared with $90.7 million in the comparable prior year period.

Capital expenditures for the twelve weeks ended November 21, 2020 were $113.0 million compared to $101.4 million for the comparable prior year period.

The increase is primarily driven by increased store openings compared to the comparable prior year period.

During the twelve week period ended November 21, 2020 and November 23, 2019, we opened 41 and 22 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $46.0 million and sold $51.2 million in marketable debt securities during the twelve weeks ended November 21, 2020.

During the comparable prior year period, the captive purchased $35.4 million in marketable debt securities and sold $45.8 million.

Our net cash flows used in financing activities for the twelve weeks ended November 21, 2020 were $663.4 million compared to $375.8 million in the comparable prior year period.

We did not have any commercial paper activity during the twelve week period ended November 21, 2020 as compared to $79.7 million in net proceeds in the comparable prior year period.

Stock repurchases were $678.3 million in the current twelve week period as compared with $450.0 million in the comparable prior year period.

For the twelve weeks ended November 21, 2020, proceeds from the sale of common stock and exercises of stock options provided $28.7 million.

In the comparable prior year period, proceeds from the sale of common stock and exercises of stock options provided $8.8 million.

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

During fiscal 2021, we expect to increase the investment in our business as compared to fiscal 2020.

The expected increase is driven by delays in capital spending for the third and fourth quarter of fiscal 2020 related to the COVID-19 pandemic.

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

4 unchanged sentences

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.

Certain vendors participate in arrangements with financial institutions whereby they factor their AutoZone receivables, allowing them to receive early payment from the financial institution on our invoices at a discounted rate.

The terms of these agreements are between the vendor and the financial institution.

Upon request from the vendor, we confirm to the vendor’s financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances.

A downgrade in our credit or changes in the financial markets may limit the financial institutions’ willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms.

A reduction in payment terms would increase the working capital required to fund future inventory investments.

Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio.

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

Accounts payable, as a percentage of gross inventory, was 114.1% at November 21, 2020, compared to 110.3% at November 23, 2019.

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

The balance may be funded through new borrowings.

We anticipate that we will be able to obtain such financing in view of our current credit ratings and favorable experiences in the debt markets in the past.

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

We anticipate that we will be able to obtain such financing based on our current credit ratings and favorable experiences in the debt markets in the past.

For the trailing four quarters ended November 21, 2020, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 40.3% as compared to 35.5% 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.

For the trailing four quarters ended November 21, 2020, ROIC was presented net of average excess cash of $668.0 million.

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

3 unchanged sentences

(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.

(ii) 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;

(iii) the termination date of the Revolving Credit Agreement was extended from November 18, 2021 until November 18, 2022;

and (iv) 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.

1 unchanged sentence

Interest accrues on base rate loans as defined in the Revolving Credit Agreement.

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

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 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.

1 unchanged sentence

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.

As of November 21, 2020, we had no outstanding borrowings under either of our revolving credit facilities and $1.7 million of outstanding letters of credit under the Revolving Credit Agreement.

Under our revolving credit agreements, 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.

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

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

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

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

As of November 21, 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 $224.3 million in letters of credit outstanding as of November 21, 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 Senior Notes are subject to an interest rate adjustment if the debt ratings assigned are downgraded (as defined in the agreements).

Further, the Senior Notes contain a provision that repayment 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, sale and leaseback transactions and consolidations, mergers and the sale of assets.

All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default occurs.

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

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

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

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.

As of November 21, 2020, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

As of November 21, 2020, the $250 million 2.500% Senior Notes due April 2021 are classified as long-term in the Condensed Consolidated Balance Sheets as we have the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit agreements.

As of November 21, 2020, we had $2.748 billion of availability under our $2.750 billion revolving credit agreements, 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, rent and share-based compensation expense (“EBITDAR”) ratio was 1.9:1 as of November 21, 2020 and was 2.5:1 as of November 23, 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.

and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent, and share-based compensation expense to net income.

Adjusted debt to EBITDAR is calculated on a trailing four quarter basis.

For the trailing four quarters ended November 21, 2020, debt was presented net of excess cash of $1.469 billion.

We target our debt levels to a ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings.

4 unchanged sentences

Stock Repurchases

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

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

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

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

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

From January 1, 1998 to November 21, 2020, we have repurchased a total of 148.3 million shares of our common stock at an aggregate cost of $23.032 billion, including 584,379 shares of our common stock at an aggregate cost of $678.3 million during the twelve week period ended November 21, 2020.

Considering cumulative repurchases as of November 21, 2020, we had $117.6 million remaining under the Board’s authorization to repurchase our common stock.

On December 15, 2020, the Board voted to increase the authorization by $1.5 billion to raise the cumulative share repurchase authorization from $23.15 billion to $24.65 billion.

Subsequent to November 21, 2020, we have repurchased 97,140 shares of our common stock at an aggregate cost of $110.0 million.

Considering the cumulative repurchases and the increase in authorization subsequent to November 21, 2020, we have $1.508 billion remaining under the Board’s authorization to repurchase our common stock.

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.

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

Our total stand-by letters of credit commitment at November 21, 2020, was $250.9 million, compared with $246.9 million at August 29, 2020, and our total surety bonds commitment at November 21, 2020, was $40.7 million, compared with $56.7 million at August 29, 2020.

Financial Commitments

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

As of November 21, 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 29, 2020.

Reconciliation of Non-GAAP Financial Measures

2 unchanged sentences

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.

However, we have presented non-GAAP financial measures, as we believe they provide additional information that is useful to investors as it indicates more clearly our comparative year-to-year operating results.

Furthermore, our management and the Compensation Committee of the Board use these non-GAAP financial measures to analyze and compare our underlying operating results and use select measurements 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.

1 unchanged sentence

Adjusted After-Tax ROIC

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended November 21, 2020 and November 23, 2019.

Trailing Four

4 unchanged sentences

Tax effect (3)

Deferred tax liabilities, net of repatriation tax

Adjusted after-tax return

7 unchanged sentences

(in thousands, except percentages)

Impairment before tax impact

Pension termination charges before tax impact

Interest expense

Rent expense (2)

Tax effect (3)

8 unchanged sentences

Adjusted Debt to EBITDAR

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

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended November 21, 2020 and November 23, 2019.

Trailing Four

Quarters Ended

(in thousands, except ratio)

(in thousands, except ratios)

Interest expense

1 unchanged sentence

Adjusted EBIT

Depreciation expense

Depreciation and amortization expense

Rent expense (2)

1 unchanged sentence

Adjusted EBITDAR

Finance lease liabilities

Financing lease liabilities

Adjusted debt

3 unchanged sentences

(in thousands, except ratio)

Impairment before tax impact

Pension termination charges before tax impact

Interest expense

1 unchanged sentence

Adjusted EBIT

Depreciation expense

Depreciation and amortization expense

Rent expense (2)

Share-based expense

4 unchanged sentences

(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.

The table below outlines the calculation of rent expense and reconciles rent expense to total lease cost, per ASC 842, the most directly comparable GAAP financial measure, for the thirty-six weeks ended May 9, 2020.

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

(2) 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 52 weeks ended November 21, 2020 and 53 weeks ended November 23, 2019 (in thousands):

Total lease cost, per ASC 842, for the 52 weeks ended November 21, 2020

Finance lease interest and amortization

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

Variable operating lease components, related to insurance and common area maintenance for the 52 weeks ended November 21, 2020

Rent expense for the 52 weeks ended November 21, 2020

Total lease cost, per ASC 842, for the 12 weeks ended November 23, 2019

Finance lease interest and amortization

Variable operating lease components, related to insurance and common area maintenance for the 12 weeks ended November 23, 2019

Rent expense for the 12 weeks ended November 23, 2019

Rent expense for the 41 weeks ended August 31, 2019 as previously reported prior to the adoption of ASC 842

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.

Rent expense for the 53 weeks ended November 23, 2019

(3) Effective tax rate over trailing four quarters ended November 21, 2020 and November 23, 2019 is 21.6% and 20.7%, respectively.

(4) Average debt for the trailing four quarters ended November 21, 2020 is presented net of average excess cash of $668.0 million.

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

(6) The Company ended the 12 weeks ended November 21, 2020 with excess cash of $1.469 billion.

Debt is presented net of excess cash.

Recent Accounting Pronouncements

1 unchanged sentence

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 29, 2020.

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.

There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended August 29, 2020.

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