What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-10-25 compared with 2020-10-26 · 190 added, 132 removed, 249 unchanged (56% of the section changed)

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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 and www.alldatadiy.com.

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

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

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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 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.

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 $83.9 million of expense included in Operating, selling, general and administrative expenses in the Condensed Consolidated Statements of Income for the year ended August 29, 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.

We have also experienced challenges in recruiting and hiring employees in certain of our retail stores and distribution centers.

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

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 or 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 sourcing quality merchandise domestically and outside the U.S.

at competitive prices, some of which would adversely impact our business and results of operations.

Further, a resurgence of the outbreak or other unforeseen developments may impede our ability to complete construction and open new stores at our desired pace.

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 for fiscal 2020, 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.

COVID-19 continues to impact numerous aspects of our business.

Our sales remain at record levels as we have experienced unprecedented customer demand for our products during the COVID-19 pandemic, as we believe that many of our customers have benefitted from pandemic-related government stimulus and benefits.

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

We continue to invest in supplies for the protection of our employees and customers and increased the frequency of cleaning and disinfecting our stores.

For fiscal 2021, we incurred approximately $43.0 million in pandemic related expenses, including Emergency Time-Off benefit enhancements for both full-time and part-time employees as compared to approximately $83.9 million in the comparable prior year period.

The long-term impact to our business remains unknown as 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, the likelihood of additional variants and resurgences of the outbreak, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, and unintended consequences of the foregoing.

Furthermore, the continuing pandemic and related economic uncertainty may result in prolonged disruption and volatility to our business and magnify certain risks, including risks associated with sourcing quality merchandise domestically and outside the U.S.;

our ability to promptly adjust inventory levels to meet fluctuations in customer demand;

our ability to comply with complex and evolving laws and regulations related to customers’ and AutoZoners’ health and safety;

our ability to open new store locations and expand or remodel existing stores;

and our ability to hire and train qualified employees to address temporary or sustained labor shortages.

Executive Summary

For fiscal 2020, we achieved record net income of $1.733 billion, a 7.2% increase over the prior year, and sales growth of $768.2 million, a 6.5% increase over the prior year.

Domestic commercial sales increased 6.4%, which represents 21.6% of our total sales.

Fiscal 2020 consisted of 52 weeks whereas fiscal 2019 consisted of 53 weeks.

Both our retail sales and commercial sales grew this past year as we continue to make progress on our initiatives that are aimed at improving our ability to say “Yes” to our customers more frequently, drive traffic to our stores and accelerate our commercial growth.

For fiscal 2021, we achieved record net income of $2.170 billion, a 25.2% increase over the prior year, and sales growth of $1.998 billion, a 15.8% increase over the prior year.

Domestic commercial sales increased 22.6%, which represents approximately 23% of our total sales.

Both our retail sales and commercial sales grew this past year as we continue to experience unprecedented demand for our products during the COVID-19 pandemic and make progress on our initiatives aimed at improving our ability to say “Yes” to our customers more frequently, drive traffic to our stores and accelerate our commercial 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, supply chain disruptions, hiring and other economic conditions, including for fiscal 2021 and 2020, 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.

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During fiscal 2021, the average price per gallon of unleaded gasoline in the U.S.

was $2.32 per gallon, compared to $2.63 per gallon during fiscal 2019.

was $2.62, compared to $2.32 during fiscal 2020.

We believe fluctuations in gas prices impact our customers’ level of disposable income.

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during fiscal 2021.

Some of this is attributed to regulatory changes in certain states and municipalities, while the larger portion is being driven by general market pressures and some specific actions taken in recent years by other retailers.

The regulatory changes are expected to continue, as evidenced by the areas that have passed legislation to increase employees’ wages substantially over the next few years, but we are still assessing to what degree these changes will impact our earnings growth in future periods.

During fiscal 2021, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 83% of total sales, with failure related categories continuing to comprise our largest set of categories.

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

We believe the improvement in this sales category resulted from the pandemic as many of our customers had more time to work on projects.

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

We believe the improvement in this sales category resulted from the pandemic as many of our customers continue to have more time to work on discretionary projects.

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

We believe that as the number of miles driven increases, consumers’ vehicles are more likely to need service and maintenance, resulting in an increase in the need for automotive hard parts and maintenance items.

We believe as the number of miles driven increases, consumers’ vehicles are more likely to need service and maintenance, resulting in an increase in the need for automotive hard parts and maintenance items.

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 certain time frames of minimal correlation in sales performance and miles driven.

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decreased by 5.2% compared to the same period in the prior year.

We believe this decrease is a result of the pandemic, but we are unable to predict if this decline will continue and are uncertain if it continues the impact it will have to our business.

We believe this decrease is a result of the pandemic, but we are unable to predict if this decline will continue and are uncertain of the impact it will have to our business.

Seven Year Old or Older Vehicles

New vehicles sales decreased 0.8% during 2020 as compared to the prior calendar year.

According to the latest data provided by the U.S.

Bureau of Economic Analysis, new light vehicle sales for the year ended August 2021 increased 11.5% as compared to the comparable prior year period.

We estimate vehicles are driven an average of approximately 12,500 miles each year.

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Our experience is that at this point in a vehicle’s life, most vehicles are not covered by warranties and increased maintenance is needed to keep the vehicle operating.

According to the latest data provided by the Auto Care Association, as of January 1, 2020, the average age of vehicles on the road was 11.9 years.

For the ninth consecutive year, the average age of vehicles has exceeded 11 years.

According to the latest data provided by the Auto Care Association, as of January 1, 2021, the average age of light vehicles on the road was 12.1 years.

The average age of light vehicles has exceeded 11 years since 2012.

We expect the aging vehicle population to continue to increase as consumers keep their cars longer in an effort to save money.

Additionally, there is increased demand for used vehicles as a result of new vehicle inventory shortages during the COVID-19 pandemic.

As the number of seven year old or older vehicles on the road increases, we expect an increase in demand for the products we sell.

Results of Operations

The following table highlights selected financial information over the last 5 years:

Fiscal Year Ended August

(in thousands, except per share data, same store sales and selected operating data)

Income Statement Data

Cost of sales, including warehouse and delivery expenses

Operating, selling, general and administrative expenses

Operating profit

Interest expense, net

Income before income taxes

Income tax expense (4)

Net income (4)

Diluted earnings per share (4)

Weighted average shares for diluted earnings per share (4)

Same Store Sales

Increase in domestic comparable store net sales (5)

Balance Sheet Data

Current assets

Operating lease right-of-use assets (6)

Working capital (deficit)

Current liabilities

Finance lease liabilities, less current portion (6)

Operating lease liabilities, less current portion (6)

Stockholders’ deficit

Selected Operating Data

Number of locations at beginning of year

Sold locations (7)

New locations

Closed locations

Net new locations

Relocated locations

Number of locations at end of year

AutoZone domestic commercial programs

Inventory per location (in thousands)

Total AutoZone store square footage (in thousands)

Average square footage per AutoZone store

Increase in AutoZone store square footage

Average net sales per AutoZone store (in thousands)

Net sales per AutoZone store average square foot

Total employees at end of year (in thousands)

Inventory turnover (8)

Accounts payable to inventory ratio

After-tax return on invested capital (9)

Adjusted debt to EBITDAR (10)

Net cash provided by operating activities (in thousands) (4)

Cash flow before share repurchases and changes in debt (in thousands) (11)

Share repurchases (in thousands) (12)

Number of shares repurchased (in thousands) (12)

(1) The 52 weeks ended August 28, 2021 and August 29, 2020 were negatively impacted by pandemic related expenses, including Emergency Time-Off of approximately $43.0 million (pre-tax) and $83.9 million (pre-tax), respectively.

(2) The fiscal year ended August 31, 2019 consisted of 53 weeks.

(3) Fiscal 2018 was negatively impacted by pension termination charges of $130.3 million (pre-tax) recognized in the fourth quarter and asset impairments of $193.2 million (pre-tax) recognized in the second quarter of fiscal 2018.

Fiscal 2019 and 2018 also includes a benefit to net income related to the Tax Cuts and Jobs Act of $6.3 million and $132.1 million, net of repatriation tax, respectively.

(4) Fiscal 2021, 2020, 2019, 2018 and 2017 include excess tax benefits from stock option exercises of $56.4 million, $20.9 million, $46.0 million, $31.3 million and $31.2 million, respectively.

(5) The domestic comparable sales increases are based on sales for all AutoZone domestic stores open at least one year.

Same store sales are computed on a 52-week basis.

Relocated stores are included in the same store sales computation based on the year the original store was opened.

Closed store sales are included in the same store sales computation up to the week it closes, and excluded from the computation for all periods subsequent to closing.

All sales through our www.autozone.com website, including consumer direct ship-to-home sales, are also included in the computation.

(6) The Company adopted ASU 2016-02, Leases (Topic 842), beginning with its first quarter ended November 23, 2019 which resulted in the Company recognizing a right-of-use asset (“ROU asset”) and a corresponding lease liability on the balance sheet.

(7) 26 IMC branches were sold on April 4, 2018.

(8) Inventory turnover is calculated as cost of sales divided by the average merchandise inventory balance over the trailing 5 quarters.

(9) After-tax return on invested capital is defined as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize leases).

For fiscal 2019, after-tax operating profit was adjusted for the impact of the average revaluation of deferred tax liabilities, net of repatriation tax.

For fiscal 2018, after-tax operating profit was adjusted for impairment charges, pension termination charges and the impact of the revaluation of deferred tax liabilities, net of repatriation tax.

See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(10) Adjusted debt to EBITDAR is defined as the sum of total debt, finance lease obligations and annual rents times six;

divided by net income plus interest, taxes, depreciation, amortization, rent and share-based compensation expense.

For fiscal 2018, net income was adjusted for impairment charges and pension termination charges before tax impact.

See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(11) Cash flow before share repurchases and changes in debt is defined as the change in cash and cash equivalents less the change in debt plus treasury stock purchases.

See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(12) During the third quarter of fiscal 2020, the Company temporarily suspended share repurchases under the share repurchase program in response to COVID-19 which was restarted beginning in the first quarter of fiscal 2021.

Fiscal 2021 Compared with Fiscal 2020

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This growth was driven primarily by a domestic same store sales increase of 13.6% and net sales of $215.8 million from new stores.

Same store sales are computed on a 52-week basis.

Domestic commercial sales increased $617.7 million, or 22.6%, over domestic commercial sales for fiscal 2020.

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We reported a total auto parts segment (domestic, Mexico and Brazil) sales increase of 15.9% for fiscal 2021.

Gross profit for fiscal 2020 was $6.771 billion, or 53.6% of net sales, a 5 basis point decrease compared with $6.365 billion, or 53.7% of net sales for fiscal 2019.

The decrease in gross margin was primarily attributable to lower merchandise margins driven primarily by a shift in mix.

Gross profit for fiscal 2021 was $7.718 billion, or 52.8% of net sales, an 85 basis point decrease compared with $6.771 billion, or 53.6% of net sales for fiscal 2020.

The decrease in gross margin was primarily driven by the initiatives to accelerate growth in our commercial business.

Operating, selling, general and administrative expenses for fiscal 2021 increased to $4.773 billion, or 32.6% of net sales, from $4.353 billion, or 34.5% of net sales for fiscal 2020.

The decrease in operating expenses, as a percentage of sales, was primarily due to leverage from higher sales growth, partially offset by $83.9 million of costs incurred in response to COVID-19.

The reduction in operating expenses as a percentage of sales was driven by strong sales growth and a decrease in pandemic related expenses.

Interest expense, net for fiscal 2021 was $195.3 million compared with $201.2 million during fiscal 2020.

This increase was primarily due to higher debt levels.

Average borrowings for fiscal 2021 were $5.401 billion, compared with $5.393 billion for fiscal 2020.

Weighted average borrowing rates were 3.3% for fiscal 2020 and 3.2% for fiscal 2019.

Weighted average borrowing rates were 3.28% and 3.26% for fiscal 2021 and 2020, respectively.

Our effective income tax rate was 21.1% of pre-tax income for fiscal 2021 compared to 21.8% for fiscal 2020.

The increase in the tax rate was primarily attributable to a reduced benefit from stock options exercised during fiscal 2020 compared to fiscal 2019.

The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during fiscal 2021 compared to fiscal 2020.

The benefit of stock options exercised for fiscal 2021 was $56.4 million compared to $20.9 million for fiscal 2020 (see “Note D – Income Taxes” in the Notes to Consolidated Financial Statements).

Net income for fiscal 2021 increased by 25.2% to $2.170 billion, and diluted earnings per share increased 32.3% to $95.19 from $71.93 in fiscal 2020.

Net income and diluted earnings per share for fiscal 2019 benefitted from an additional week of sales.

The impact on the fiscal 2021 diluted earnings per share from stock repurchases was an increase of $5.13.

Fiscal 2020 Compared with Fiscal 2019

A discussion of changes in our results of operations from fiscal 2018 to fiscal 2019 has been omitted from this Form 10-K, but may be found in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended August 31, 2019, filed with the SEC on October 28, 2019, which is available free of charge on the SECs website at www.sec.gov and at www.autozone.com, by clicking “Investor Relations” located at the bottom of the page.

A discussion of changes in our results of operations from fiscal 2019 to fiscal 2020 has been omitted from this Annual Report on Form 10-K, but may be found in “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended August 29, 2020, filed with the SEC on October 26, 2020, which is available free of charge on the SECs website at www.sec.gov and at www.autozone.com, by clicking “Investor Relations” located at the bottom of the page.

Quarterly Periods

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consisted of 16 weeks in 2020, 17 weeks in 2019 and 16 weeks in 2018.

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consisted of 16 weeks in 2021 and 2020 and 17 weeks in 2019.

Because the fourth quarter contains seasonally high sales volume and consists of 16 or 17 weeks, compared with 12 weeks for each of the first three quarters, our fourth quarter represents a disproportionate share of our annual net sales and net income.

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and the fourth quarter of fiscal year 2019 represented 33.6% of annual sales and 35.0% of net income.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted into law.

Tax Reform significantly revises the U.S.

federal corporate income tax by, among other things, lowering the statutory federal corporate rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries, and changing how foreign earnings are subject to U.S.

Also, in December 2017, the SEC issued Staff Accounting Bulletin No.

118 (“SAB 118”) to address the application of GAAP in situations when the registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of Tax Reform.

During the year ended August 25, 2018, we recorded provisional tax benefit of $131.5 million related to Tax Reform, comprised of $157.3 million remeasurement of its net Deferred Tax Asset (“DTA”), offset by $25.8 million of transition tax.

During the year ended August 31, 2019, we completed our analysis of Tax Reform and recorded adjustments to the previously-recorded provisional amounts, resulting in an $8.8 million tax benefit, primarily related to transition tax on accumulated earnings of foreign subsidiaries.

Beginning with the year ending August 31, 2019, we are subject to a new tax on global intangible low-taxed income (“GILTI”) that is imposed on foreign earnings.

We have made the election to record this tax as a period cost and therefore, have not adjusted the deferred tax assets or liabilities of our foreign subsidiaries for the new tax.

Net impacts for GILTI are included in the provision for income taxes for the years ended August 29, 2020 and August 31, 2019.

Liquidity and Capital Resources

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

Unprecedented customer demand from the impact of the COVID-19 pandemic and continued progress on our initiatives improved our operating performance for the fiscal year, which drove a substantial increase in cash flows from operations.

We believe that our cash generated from operating activities, available cash reserves and available credit, supplemented with our long-term borrowings will provide ample liquidity to fund our operations while allowing us to make strategic investments to support long-term growth initiatives and return excess cash to shareholders in the form of share repurchases.

As of August 28, 2021, we held $1.171 billion of cash and cash equivalents, as well as $1.998 billion in undrawn capacity on our revolving credit facility.

We believe our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due and fund our share repurchases over the short-term and long-term.

In addition, we believe we have the ability to obtain alternative sources of financing, if necessary.

Net cash provided by operating activities was $3.519 billion in 2021, $2.720 billion in 2020 and $2.129 billion in 2019.

Cash flows from operations are favorable compared to last year primarily due to growth in net income due to accelerated sales growth as a result of the pandemic.

Cash flows from operations are favorable compared to last year primarily due to favorable changes in accounts payable, driven by higher sustained inventory purchase volume in fiscal 2021 as compared to fiscal 2020, and growth in net income due to accelerated sales growth as a result of the pandemic.

Our net cash flows used in investing activities were $601.8 million in fiscal 2021, $497.9 million in fiscal 2020 and $491.8 million in fiscal 2019.

The increase in net cash used in investing activities in fiscal 2020, compared to fiscal 2019, was the result of an investment in a tax credit equity investment, partially offset by a decrease in capital expenditures.

The increase in net cash used in investing activities in fiscal 2021, compared to fiscal 2020, was due to an increase in capital expenditures.

We invested $621.8 million in capital assets in fiscal 2021, $457.7 million in fiscal 2020 and $496.1 million in fiscal 2019.

We had 138 new location openings for fiscal 2020, 209 for fiscal 2019 and 201 for fiscal 2018.

The decrease in capital expenditures from fiscal 2019 to fiscal 2020 was attributable to delayed store openings in response to COVID-19.

The increase in capital expenditures from fiscal 2020 to fiscal 2021 was primarily driven by increased store openings.

We had 218 net new store openings for fiscal 2021, 138 for fiscal 2020 and 209 for fiscal 2019.

We invest a portion of our assets held by our wholly owned insurance captive in marketable debt securities.

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We had proceeds from the sale of marketable debt securities of $95.4 million in fiscal 2021, $84.2 million in fiscal 2020 and $53.1 million in fiscal 2019.

Net cash used in financing activities was $643.6 million in fiscal 2020, $1.674 billion in fiscal 2019 and $1.632 billion in fiscal 2018.

The net cash used in financing activities reflected purchases of treasury stock, which totaled $930.9 million for fiscal 2020, $2.005 billion for fiscal 2019 and $1.592 billion for fiscal 2018.

The decrease in purchases of treasury stock for fiscal 2020 was due to the temporary suspension of the share repurchase program in order to conserve liquidity in response to the uncertainty related to COVID-19.

Net cash used in financing activities was $3.5 billion in fiscal 2021, $643.6 million in fiscal 2020 and $1.674 billion in fiscal 2019.

The net cash used in financing activities reflected purchases of treasury stock, which totaled $3.378 billion for fiscal 2021, $930.9 million for fiscal 2020 and $2.005 billion for fiscal 2019.

The increase in purchases of treasury stock for fiscal 2021 in comparison to fiscal 2020 was due to resuming our share repurchase program which was temporarily suspended in fiscal 2020 due to the COVID-19 pandemic.

The treasury stock purchases in fiscal 2021, 2020 and 2019 were primarily funded by cash flows from operations.

The Company issued $1.850 billion of new debt in 2020, $750 million in fiscal 2019 and none in fiscal 2018.

During the year ended August 28, 2021, we repaid our $250 million 2.500% Senior Notes due April 2021, which were callable at par in March 2021.

We did not issue any new debt in fiscal 2021, and issued $1.850 billion and $750 million in fiscal 2020 and 2019, respectively.

In fiscal 2020, the proceeds from the issuance of debt were used for general corporate purposes, repayment of our outstanding commercial paper and repayment of our $500 million Senior Notes due in November 2020 which were callable at par in August 2020.

In fiscal 2019, the proceeds from the issuance of debt were used to repay a portion of our outstanding commercial paper borrowings, our $250 million Senior Notes due in April 2019 and for general corporate purposes.

In fiscal 2018, we used commercial paper borrowings to repay our $250 million Senior Notes due in August 2018.

In fiscal 2020, we made net repayments of commercial paper and short term borrowings in the amount of $1.030 billion.

Net repayments of commercial paper and short term borrowings for fiscal 2019 were $295.3 million and net proceeds from the issuance of commercial paper and short-term borrowings for fiscal 2018 were $170.2 million.

We did not have any commercial paper or short term borrowing activity during fiscal 2021.

Net repayments of commercial paper and short term borrowings were $1.030 billion and $295.3 million for 2020 and 2019, respectively.

During fiscal 2022, we expect to increase the investment in our business as compared to fiscal 2021.

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

Our investments are expected to be directed primarily to new locations, supply chain infrastructure, enhancements to existing locations and investments in technology.

The amount of investments in our new locations 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 United States, Mexico or Brazil, or located in urban or rural areas.

During fiscal 2020, 2019 and 2018 our capital expenditures decreased from the prior fiscal year by approximately 8%, 5% and 6%, respectively.

In addition to building and land costs, our new locations require working capital, predominantly for inventories.

Our investments are expected to be directed primarily to expansion of our store base and supply chain to fuel the growth of our domestic and Mexico businesses, which includes new stores, including mega hubs, as well as distribution center expansions and remodels.

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

During fiscal 2021 our capital expenditures increased by approximately 36%, compared to a decrease of 8% and 5%, for fiscal 2020 and 2019 respectively.

Fiscal 2021 capital expenditures increased significantly due to delays in capital spending for the third and fourth quarter of fiscal 2020 related to COVID-19.

In addition to building and land costs, our new stores require working capital, predominantly for inventories.

Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio.

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We had an accounts payable to inventory ratio of 129.6% at August 28, 2021 and 115.3% at August 29, 2020.

The increase from fiscal 2019 was primarily due to accelerated sales growth.

The increase from fiscal 2020 was primarily due to increased accounts payable purchases with favorable vendor terms and higher inventory turns.

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 credit ratings and favorable experiences in the debt markets in the past.

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

Our cash balances are held in various locations around the world.

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and were generally utilized to support the liquidity needs in our foreign operations.

For the fiscal year ended August 29, 2020, our after-tax return on invested capital (“ROIC”) was 38.1% as compared to 35.7% for the comparable prior year period.

ROIC is calculated as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize operating leases).

For fiscal 2020, ROIC was presented net of average excess cash of $374.2 million.

For fiscal 2019, after-tax operating profit was adjusted for the Tax Reform’s impact on the revaluation of deferred tax liabilities, net of the repatriation tax.

We use 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 fiscal year ended August 28, 2021, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 41.0% as compared to 35.7% for the comparable prior year period.

Adjusted ROIC is calculated as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize operating leases).

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

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

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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, specifically the pandemic, and supplement 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 August 29, 2020, we had no outstanding borrowings under each of our revolving credit agreements and had $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.

As of August 28, 2021, we had no outstanding borrowings and $1.7 million of outstanding letters of credit under the Revolving Credit Agreement.

We intend to amend and restate our Revolving Credit Agreement and anticipate closing the agreement during the first quarter of fiscal year 2022.

Under our Revolving Credit Agreement, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances.

The Revolving Credit Agreement requires that our consolidated interest coverage ratio as of the last day of each quarter shall be no less than 2.5:1.

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Our consolidated interest coverage ratio as of August 28, 2021 was 6.9:1.

As of August 29, 2020, the $250 million 2.500% Senior Notes due April 2021 are classified as long-term in the accompanying 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 August 29, 2020, we had $2.748 billion of availability, before giving effect to commercial paper borrowings, under our $2.750 billion revolving credit agreements which would allow us to replace these short-term obligations with long-term financing facilities.

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 August 29, 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 $220.3 million in letters of credit outstanding as of August 29, 2020.

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

On April 3, 2020, we entered into a 364-Day Credit Agreement (the “364-Day Credit Agreement”) to supplement our existing Revolving Credit Agreement.

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

The 364-Day Credit Agreement had a termination date of, and any amounts borrowed under the 364-Day Credit Agreement were due and payable on April 2, 2021.

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

Effective February 2021, we terminated the 364-Day Credit Agreement.

There were no borrowings outstanding under the 364-Day Credit Agreement.

We entered into the 364-Day Agreement to augment our access to liquidity due to the macroeconomic conditions existing at the time, and we determined the additional access to liquidity was no longer necessary.

As of August 28, 2021, the $500 million 3.700% Senior Notes due April 2022 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 facility.

As of August 28, 2021, we had $1.998 billion of availability under our $2.0 billion Revolving Credit Agreement, which would allow us to replace these short-term obligations with a long-term financing facility.

On March 15, 2021, we repaid the $250 million 2.500% Senior Notes due April 2021 which were callable at par in March 2021.

On August 14, 2020, we issued $600 million in 1.650% Senior Notes due January 2031 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.

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

The 2019 Shelf Registration Statement 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, including the repayment of the $500 million in 4.000% Senior Notes due in November 2020 that were callable at par in August 2020.

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 the 2019 Shelf Registration.

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 the 2019 Shelf Registration Statement.

Proceeds from the debt issuance were used to repay a portion of the outstanding commercial paper borrowings and for other general corporate purposes.

On April 18, 2019, we issued $300 million in 3.125% Senior Notes due April 2024 and $450 million in 3.750% Senior Notes due April 2029 under the 2019 Shelf Registration.

On April 18, 2019, we issued $300 million in 3.125% Senior Notes due April 2024 and $450 million in 3.750% Senior Notes due April 2029 under the 2019 Shelf Registration Statement.

Proceeds from the debt issuance were used to repay a portion of our outstanding commercial paper borrowings, the $250 million in 1.625% Senior Notes due in April 2019 and for other general corporate purposes.

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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.

Interest is paid on a semi-annual basis.

As of August 28, 2021, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

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 August 28, 2021, we had $23.9 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 facility discussed above, we had $136.8 million in letters of credit outstanding as of August 28, 2021.

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

For the fiscal year ended August 28, 2021, our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.0:1 as compared to 2.4:1 as of the comparable prior year end.

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

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

For fiscal 2020, debt was presented net of excess cash, which ended the year at $1.6 billion.

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

We target our debt levels to a specified ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings and believe this is important information for the management of our debt levels.

To the extent EBITDAR continues to grow in future years, we expect our debt levels to increase;

conversely, if EBITDAR declines, we would expect our debt levels to decrease.

Management expects the ratio of adjusted debt to EBITDAR to return to pre-pandemic levels in the future, increasing debt levels.

Once the target ratio is achieved, to the extent adjusted EBITDAR increases, we expect our debt levels to increase;

conversely, if adjusted EBITDAR decreases, we would expect our debt levels to decrease.

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

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During 1998, we announced a program permitting us to repurchase a portion of our outstanding shares not to exceed a dollar maximum established by our Board of Directors (the “Board”).

On October 7, 2019, the Board voted to authorize the repurchase of an additional $1.25 billion of our common stock in connection with our ongoing share repurchase program.

Since the inception of the repurchase program in 1998, the Board has authorized $23.15 billion in share repurchases.

On December 15, 2020, the Board voted to increase the authorization by $1.5 billion.

On March 23, 2021, the Board voted to increase the repurchase authorization by an additional $1.5 billion, which raised the total value of shares authorized to be repurchased to $26.15 billion.

From January 1998 to August 28, 2021, we have repurchased a total of 150.3 million shares at an aggregate cost of $25.732 billion.

We repurchased 826 thousand shares of common stock at an aggregate cost of $930.9 million during fiscal 2020, 2.2 million shares of common stock at an aggregate cost of $2.005 billion during fiscal 2019 and 2.4 million shares of common stock at an aggregate cost of $1.592 billion during fiscal 2018.

The decrease in purchases of treasury stock for fiscal 2020 was due to the temporary suspension of the share repurchase program in order to preserve cash as a result of the uncertainty related to the pandemic.

We repurchased 2.6 million shares of common stock at an aggregate cost of $3.378 billion during fiscal 2021, 826 thousand shares of common stock at an aggregate cost of $930.9 million during fiscal 2020 and 2.2 million shares of common stock at an aggregate cost of $2.005 billion during fiscal 2019.

The increase in purchases of treasury stock for fiscal 2021 compared to fiscal 2020 was due to the temporary suspension of the share repurchase program during fiscal 2020 in order to preserve cash as a result of the uncertainty related to the pandemic.

Purchases under the program resumed beginning in the first quarter of fiscal 2021.

Considering cumulative repurchases as of August 28, 2021, we had $417.6 million remaining under the Board’s authorization to repurchase our common stock.

We will continue to evaluate current and expected business conditions and adjust the level of share repurchases under our share repurchase program as we deem appropriate.

For the fiscal year ended August 28, 2021, cash flow before share repurchases and changes in debt was $3.049 billion as compared to $2.185 billion during the comparable prior year period.

Cash flow before share repurchases and changes in debt is calculated as the net increase or decrease in cash and cash equivalents less net increases or decreases in debt plus share repurchases.

Cash flow before share repurchases and changes in debt is calculated as the net increase or decrease in cash and cash equivalents less net increases or decreases in debt (excluding deferred financing costs) plus share repurchases.

We use cash flow before share repurchases and changes in debt to calculate the cash flows remaining and available.

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

During fiscal 2020, we temporarily ceased share repurchases under our share repurchase program to conserve liquidity in response to the uncertainty related to COVID-19.

While we have restarted share repurchases during the first quarter of fiscal year 2021, we will continue to evaluate current and expected business conditions and adjust the level of share repurchases under our share repurchase program as we deem appropriate.

Subsequent to August 29, 2020, we have repurchased 269,795 shares of common stock at an aggregate cost of $314.4 million.

Considering the cumulative repurchases subsequent to August 29, 2020, we have $481.5 million remaining under the Board’s authorization to repurchase its common stock.

On October 5, 2021, the Board voted to authorize the repurchase of an additional $1.5 billion of our common stock in connection with our ongoing share repurchase program.

Since the inception of the repurchase program in 1998, the Board has authorized $27.65 billion in share repurchases.

Subsequent to August 28, 2021 and through October 18, 2021, we have repurchased 220,022 shares of common stock at an aggregate cost of $362.8 million.

Considering the cumulative repurchases and the increase in authorization subsequent to August 28, 2021 and through October 18, 2021, we have $1.555 billion remaining under the Board’s authorization to repurchase its common stock.

Financial Commitments

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(2) Represents obligations for interest payments on long-term debt.

(3) We adopted ASU 2016-02, Leases (Topic 842), beginning with our first quarter ended November 23, 2019 which resulted in us recognizing a right-of-use asset (“ROU asset”) and a corresponding lease liability on the balance sheet.

See “Note A – Significant Accounting Policies” of Item 8.

(4) Finance lease obligations include related interest.

(3) Operating and finance lease obligations include related interest in accordance with ASU 2016-02, Leases (Topic 842).

(4) Self-insurance reserves reflect estimates based on actuarial calculations and are presented net of insurance receivables.

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Reconciliation of Non-GAAP Financial Measures

“Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include certain financial measures not derived in accordance with generally accepted accounting principles (“GAAP”).

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with generally accepted accounting principles (“GAAP”).

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

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Cash Flow Before Share Repurchases and Changes in Debt

The following table reconciles net increase (decrease) in cash and cash equivalents to cash flow before share repurchases and changes in debt, which is presented in “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

The following table reconciles net increase (decrease) in cash and cash equivalents to cash flow before share repurchases and changes in debt, which is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

Fiscal Year Ended August

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Cash flow before share repurchases and changes in debt

(1) The Company adopted the provisions of ASU 2016-09, Compensation – Stock Compensation (Topic 718):

Improvement to Employee Share-based Payment Accounting, as of August 28, 201 6.

(2) During the third quarter of fiscal 2020, the Company temporarily ceased share repurchases under the share repurchase program in response to COVID-19.

(1) During the third quarter of fiscal 2020, the Company temporarily suspended share repurchases under the share repurchase program in response to COVID-19.

Reconciliation of Non-GAAP Financial Measure:

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ROIC is calculated as after-tax operating profit (excluding rent) divided by invested capital (which includes a factor to capitalize operating leases).

The ROIC percentages are presented in “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

The following table calculates the percentage of ROIC.

ROIC is calculated as after-tax operating profit (excluding rent) divided by invested capital (which includes a factor to capitalize operating leases).

The ROIC percentages are presented in “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

The ROIC percentages are presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

Fiscal Year Ended August

(in thousands, except percentages)

(in thousands, except percentage)

Impairment before tax

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divided by net income plus interest, taxes, depreciation, amortization, rent and share-based compensation expense.

The adjusted debt to EBITDAR ratios are presented in “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

The adjusted debt to EBITDAR ratios are presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”:

Fiscal Year Ended August

(in thousands, except ratios)

(in thousands, except ratio)

Impairment before tax

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Adjusted EBIT

Depreciation expense

Depreciation and amortization expense

Rent expense (3)

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(3) 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 52 weeks ended, August 29, 2020.

Total lease cost, per ASC 842, for the 52 weeks ended August 29, 2020

For the year ended

(in thousands)

August 28,2021

August 29,2020

Total lease cost, per ASC 842, for the trailing four quarters

Finance lease interest and amortization

Variable operating lease components, related to insurance and common area maintenance for the 52 weeks ended August 29, 2020

Rent expense for the 52 weeks ended August 29, 2020

Variable operating lease components, related to insurance and common area maintenance

Rent expense for the trailing four quarters

(4) For fiscal 2021, 2020, and 2019, the effective tax rate was 21.1%, 21.8%, and 20.4%, respectively.

The effective tax rate during fiscal 2018 was 24.2% for impairment, 28.1% for pension termination and 26.2% for interest and rent expense.

For fiscal 2017 and 2016 the effective tax rate was 33.5% and 35.1%, respectively.

(5) For fiscal 2019 and 2018, after-tax operating profit was adjusted for the impact of the revaluation of deferred tax liabilities, net of repatriation tax.

For fiscal 2017, the effective tax rate was 33.5%.

(5) For fiscal 2019 and fiscal 2018 after-tax operating profit was adjusted for the impact of the revaluation of deferred tax liabilities, net of repatriation tax.

(6) All averages are computed based on trailing five quarters.

(7) Average debt is presented net of average excess cash of $374.2 million.

(7) Rent is multiplied by a factor of six to capitalize operating leases in the determination of pre-tax invested capital.

(9) The Company ended fiscal 2020 with excess cash of $1.6 billion.

Debt is presented net of excess cash.

Recent Accounting Pronouncements

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Our self-insurance reserve estimates totaled $284.0 million at August 28, 2021, and $288.6 million at August 29, 2020.

This change is primarily reflective of our growing operations, including inflation, increases in healthcare costs, the number of vehicles and the number of hours worked, as well as our historical claims experience.

Where estimable, losses covered by insurance are recognized on a gross basis with a corresponding insurance receivable.

Where estimates are possible, losses covered by insurance are recognized on a gross basis with a corresponding insurance receivable.

The assumptions made by management in estimating our self-insurance reserves include consideration of historical cost experience, judgments about the present and expected levels of cost per claim and retention levels.

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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-K

Item 7. Management’s Discussion and Analysis