AUTOZONE INC 10-Q

Item 1. Financial Statements. AUTOZONE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ November 20, ​ August 28, (in thousands) ​ 2021 ​ 2021 ​ ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ ​ Current assets: ​ ​ ​ ​ Cash and cash equivalents ​ $ 961,125 ​ $ 1,171,335 Accounts receivable ​ 379,276 ​ 378,392 Merchandise inventories ​ 4,768,258 ​ 4,639,813 Other current assets ​ 240,487 ​ 225,763 Total current assets ​ 6,349,146 ​ 6,415,303 ​ ​ ​ ​ ​ ​ ​ Property and equipment: ​ ​ ​ ​ ​ ​ Property and equipment ​ 8,854,872 ​ 8,807,178 Less: Accumulated depreciation and amortization ​ ( 3,996,944 ) ​ ( 3,950,287 ) ​ ​ 4,857,928 ​ 4,856,891 ​ ​ ​ ​ ​ ​ ​ Operating lease right-of-use assets ​ ​ 2,717,566 ​ ​ 2,718,712 Goodwill ​ 302,645 ​ 302,645 Deferred income taxes ​ 40,164 ​ 41,043 Other long-term assets ​ 193,500 ​ 181,605 ​ ​ 3,253,875 ​ 3,244,005 Total assets ​ $ 14,460,949 ​ $ 14,516,199 ​ ​ ​ ​ ​ ​ ​ Liabilities and Stockholders’ Deficit ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 6,171,344 ​ $ 6,013,924 Current portion of operating lease liabilities ​ ​ 263,899 ​ ​ 236,568 Current portion of debt ​ ​ 500,000 ​ ​ — Accrued expenses and other ​ 965,898 ​ 1,039,788 Income taxes payable ​ 186,752 ​ 79,474 Total current liabilities ​ 8,087,893 ​ 7,369,754 ​ ​ ​ ​ ​ ​ ​ Debt, less current portion ​ 4,771,266 ​ 5,269,820 Operating lease liabilities, less current portion ​ ​ 2,624,676 ​ ​ 2,632,842 Deferred income taxes ​ 355,310 ​ 337,125 Other long-term liabilities ​ 746,554 ​ 704,194 ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ deficit: ​ ​ ​ ​ ​ ​ Preferred stock, authorized 1,000 shares; no shares issued ​ — ​ — Common stock, par value $ .01 per share, authorized 200,000 shares; 23,057 shares issued and 20,674 shares outstanding as of November 20, 2021; 23,007 shares issued and 21,138 shares outstanding as of August 28, 2021 ​ 231 ​ 230 Additional paid-in capital ​ 1,499,557 ​ 1,465,669 Retained earnings (deficit) ​ 135,406 ​ ( 419,829 ) Accumulated other comprehensive loss ​ ( 324,327 ) ​ ( 307,986 ) Treasury stock, at cost ​ ( 3,435,617 ) ​ ( 2,535,620 ) Total stockholders’ deficit ​ ( 2,124,750 ) ​ ( 1,797,536 ) Total liabilities and stockholders' deficit ​ $ 14,460,949 ​ $ 14,516,199 See Notes to Condensed Consolidated Financial Statements. 3 Table of Contents AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended ​ ​ November 20, ​ November 21, (in thousands, except per share data) ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ ​ Net sales $ 3,668,904 $ 3,154,261 Cost of sales, including warehouse and delivery expenses ​ ​ 1,743,744 ​ ​ 1,478,644 Gross profit ​ ​ 1,925,160 ​ 1,675,617 Operating, selling, general and administrative expenses ​ ​ 1,170,675 ​ ​ 1,060,392 Operating profit ​ ​ 754,485 ​ ​ 615,225 Interest expense, net ​ ​ 43,284 ​ ​ 46,179 Income before income taxes ​ ​ 711,201 ​ 569,046 Income tax expense ​ ​ 155,966 ​ ​ 126,613 Net income ​ $ 555,235 ​ $ 442,433 ​ ​ ​ ​ ​ ​ ​ Weighted average shares for basic earnings per share ​ 20,988 ​ 23,223 Effect of dilutive stock equivalents ​ ​ 621 ​ ​ 555 Weighted average shares for diluted earnings per share ​ 21,609 ​ 23,778 ​ ​ ​ ​ ​ ​ ​ Basic earnings per share ​ $ 26.45 ​ $ 19.05 Diluted earnings per share ​ $ 25.69 ​ $ 18.61 ​ See Notes to Condensed Consolidated Financial Statements. AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended ​ November 20, November 21, (in thousands) ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 555,235 ​ $ 442,433 Other comprehensive (loss) income: ​ ​ Foreign currency translation adjustments ​ ( 16,566 ) ​ 46,995 Unrealized losses on marketable debt securities, net of taxes ​ ( 430 ) ​ ( 309 ) Net derivative activities, net of taxes ​ 655 ​ 659 Total other comprehensive (loss) income ​ ( 16,341 ) ​ 47,345 Comprehensive income ​ $ 538,894 ​ $ 489,778 ​ See Notes to Condensed Consolidated Financial Statements. ​ 4 Table of Contents AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended ​ November 20, ​ November 21, (in thousands) ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ ​ Cash flows from operating activities: ​ ​ Net income ​ $ 555,235 ​ $ 442,433 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ Depreciation and amortization of property and equipment and intangibles ​ 99,590 ​ 89,551 Amortization of debt origination fees ​ 2,639 ​ 3,150 Deferred income taxes ​ 18,096 ​ 10,295 Share-based compensation expense ​ 14,295 ​ 10,508 Changes in operating assets and liabilities: ​ ​ Accounts receivable ​ ( 1,576 ) ​ 17,491 Merchandise inventories ​ ( 136,988 ) ​ ( 124,746 ) Accounts payable and accrued expenses ​ 89,268 ​ 56,273 Income taxes payable ​ 107,411 ​ 79,558 Other, net ​ 29,960 ​ 98,978 Net cash provided by operating activities ​ 777,930 ​ 683,491 ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ Capital expenditures ​ ( 102,269 ) ​ ( 113,036 ) Purchase of marketable debt securities ​ ( 7,026 ) ​ ( 45,985 ) Proceeds from sale of marketable debt securities ​ 3,709 ​ 51,210 Proceeds (payments) from disposal of capital assets and other, net ​ 14,625 ​ ( 2,368 ) Net cash used in investing activities ​ ( 90,961 ) ​ ( 110,179 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from financing activities: ​ ​ Net proceeds from sale of common stock ​ 21,100 ​ 28,666 Purchase of treasury stock ​ ​ ( 899,997 ) ​ ​ ( 678,324 ) Repayment of principal portion of finance lease liabilities ​ ( 13,687 ) ​ ​ ( 13,786 ) Other, net ​ ( 3,362 ) ​ — Net cash used in financing activities ​ ( 895,946 ) ​ ( 663,444 ) ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash ​ ( 1,233 ) ​ 3,322 ​ ​ ​ ​ ​ ​ ​ Net decrease in cash and cash equivalents ​ ( 210,210 ) ​ ( 86,810 ) Cash and cash equivalents at beginning of period ​ 1,171,335 ​ 1,750,815 Cash and cash equivalents at end of period ​ $ 961,125 ​ $ 1,664,005 ​ ​ ​ ​ ​ ​ ​ See Notes to Condensed Consolidated Financial Statements. ​ 5 Table of Contents AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended November 20, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Common ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ Shares Common Paid-in Retained Comprehensive Treasury ​ ​ (in thousands) ​ Issued ​ Stock ​ Capital ​ (Deficit) Earnings ​ Loss ​ Stock ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at August 28, 2021 23,007 ​ $ 230 ​ $ 1,465,669 ​ $ ( 419,829 ) ​ $ ( 307,986 ) ​ $ ( 2,535,620 ) ​ $ ( 1,797,536 ) Net income — ​ — ​ — ​ 555,235 ​ — ​ — ​ 555,235 Total other comprehensive income — ​ — ​ — ​ — ​ ( 16,341 ) ​ — ​ ( 16,341 ) Purchase of 515 shares of treasury stock — ​ — ​ — ​ — ​ — ​ ( 899,997 ) ​ ( 899,997 ) Issuance of common stock under stock options and stock purchase plans 50 ​ 1 ​ 21,100 ​ ​ — ​ ​ — ​ ​ — ​ 21,101 Share-based compensation expense — ​ — ​ 12,788 ​ — ​ — ​ — ​ 12,788 Balance at November 20, 2021 23,057 ​ $ 231 ​ $ 1,499,557 ​ $ 135,406 ​ $ ( 324,327 ) ​ $ ( 3,435,617 ) ​ $ ( 2,124,750 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended November 21, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Common ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ Shares Common Paid-in Retained Comprehensive Treasury ​ ​ (in thousands) ​ Issued ​ Stock ​ Capital ​ Deficit ​ Loss ​ Stock ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at August 29, 2020 23,697 ​ $ 237 ​ $ 1,283,495 ​ $ ( 1,450,970 ) ​ $ ( 354,252 ) ​ $ ( 356,487 ) ​ $ ( 877,977 ) Net income — ​ — ​ — ​ 442,433 ​ — ​ — ​ 442,433 Total other comprehensive income — ​ — ​ — ​ — ​ 47,345 ​ — ​ 47,345 Purchase of 584 shares of treasury stock — ​ — ​ — ​ — ​ — ​ ( 678,324 ) ​ ( 678,324 ) Issuance of common stock under stock options and stock purchase plans 64 ​ 1 ​ 28,665 ​ ​ — ​ ​ — ​ ​ — ​ 28,666 Share-based compensation expense — ​ — ​ 10,877 ​ — ​ — ​ — ​ 10,877 Balance at November 21, 2020 23,761 ​ $ 238 ​ $ 1,323,037 ​ $ ( 1,008,537 ) ​ $ ( 306,907 ) ​ $ ( 1,034,811 ) ​ $ ( 1,026,980 ) ​ See Notes to Condensed Consolidated Financial Statements. 6 Table of Contents ​ AUTOZONE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A – General The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission’s (the “SEC”) rules and regulations. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and related notes included in the AutoZone, Inc. (“AutoZone” or the “Company”) Annual Report on Form 10-K for the year ended August 28, 2021. Operating results for the twelve weeks ended November 20, 2021 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 27, 2022. Each of the first three quarters of AutoZone’s fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarters of fiscal 2022 and 2021 each have 16 weeks. The Company does not expect any recently issued accounting pronouncements to have a material effect on the Company’s financial statements and related disclosures . ​ Note B – Share-Based Payments AutoZone maintains several equity incentive plans, which provide equity-based compensation to non-employee directors and eligible employees for their service to AutoZone, its subsidiaries or affiliates. The Company recognizes compensation expense for share-based payments based on the fair value of the awards at the grant date. Share-based payments include stock option grants, restricted stock grants, restricted stock unit grants, stock appreciation rights, discounts on shares sold to employees under share purchase plans and other awards. Additionally, directors’ fees are paid in restricted stock units with value equivalent to the value of shares of common stock as of the grant date. The change in fair value of liability-based stock awards is also recognized in share-based compensation expense. ​ 7 Table of Contents Stock Options: The Company made stock option grants of 163,786 shares during the twelve week period ended November 20, 2021 and granted options to purchase 194,511 shares during the comparable prior year period. The Company grants options to purchase common stock to certain of its employees under its equity incentive plans at prices equal to the market value of the stock on the date of grant. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date. The weighted average fair value of the stock option awards granted during the twelve week periods ended November 20, 2021 and November 21, 2020, using the Black-Scholes-Merton multiple-option pricing valuation model, was $ 462.80 and $ 299.48 per share, respectively, using the following weighted average key assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended ​ ​ November 20, November 21, ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ ​ Expected price volatility 28 % 28 % Risk-free interest rate 1.1 % 0.4 % Weighted average expected lives (in years) 5.6 5.6 Forfeiture rate 10 % 10 % Dividend yield 0 % 0 % ​ During the twelve week period ended November 20, 2021, 47,705 stock options were exercised at a weighted average exercise price of $ 549.86 . In the comparable prior year period, 59,990 stock options were exercised at a weighted average exercise price of $ 496.58 . As of November 20, 2021, total unrecognized share-based expense related to stock options, net of estimated forfeitures, was approximately $ 98.4 million, before income taxes, which we expect to recognize over an estimated weighted average period of 2.2 years. Restricted Stock Units: Restricted stock unit awards are valued at the market price of a share of the Company’s stock on the date of grant. Grants of employee restricted stock units vest ratably on an annual basis over a four-year service period and are payable in shares of common stock on the vesting date. Compensation expense for grants of employee restricted stock units is recognized on a straight-line basis over the four-year service period, less estimated forfeitures, which are consistent with stock option forfeiture assumptions. Grants of non-employee director restricted stock units are made and expensed on January 1 of each year, as they vest immediately. As of November 20, 2021, total unrecognized stock-based compensation expense related to nonvested restricted stock unit awards, net of estimated forfeitures, was approximately $ 15.6 million, before income taxes, which we expect to recognize over an estimated weighted average period of 2.9 years. Transactions related to restricted stock units for the twelve weeks ended November 20, 2021 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Number Average Grant ​ ​ of Shares ​ Date Fair Value ​ ​ ​ ​ ​ ​ Nonvested at August 28, 2021 15,751 ​ $ 1,005.41 Granted 4,352 ​ ​ 1,651.22 Vested ( 5,373 ) ​ 957.89 Canceled or forfeited ( 696 ) ​ 1,023.97 Nonvested at November 20, 2021 14,034 ​ $ 1,222.96 ​ 8 Table of Contents Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $ 14.3 million for the twelve week period ended November 20, 2021, and $ 10.5 million for the comparable prior year period. For the twelve week period ended November 20, 2021, 97,942 stock options were excluded from the diluted earnings per share computation because they would have been anti-dilutive. For the comparable prior year period, 293,280 anti-dilutive stock options were excluded from the dilutive earnings per share computation. See AutoZone’s Annual Report on Form 10-K for the year ended August 28, 2021 and other filings with the SEC, for a discussion regarding the methodology used in developing AutoZone’s assumptions to determine the fair value of the option awards and a description of AutoZone’s Amended and Restated 2011 Equity Incentive Award Plan, the AutoZone, Inc. 2020 Omnibus Incentive Award Plan and the 2020 Director Compensation Program. Note C – Fair Value Measurements The Company defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with ASC 820, Fair Value Measurements and Disclosures , the Company uses the fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are set forth below: Level 1 inputs —unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date. Level 2 inputs —inputs other than quoted market prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 3 inputs —unobservable inputs for the asset or liability, which are based on the Company’s own assumptions as there is little, if any, observable activity in identical assets or liabilities. Marketable Debt Securities Measured at Fair Value on a Recurring Basis The Company’s marketable debt securities measured at fair value on a recurring basis were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ November 20, 2021 (in thousands) Level 1 Level 2 Level 3 Fair Value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other current assets ​ $ 55,414 ​ $ 106 ​ $ — ​ $ 55,520 Other long-term assets ​ 48,272 ​ 12,894 ​ — ​ 61,166 ​ ​ $ 103,686 ​ $ 13,000 ​ $ — ​ $ 116,686 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ August 28, 2021 (in thousands) Level 1 Level 2 Level 3 Fair Value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other current assets ​ $ 46,007 ​ $ — ​ $ — ​ $ 46,007 Other long-term assets ​ 54,105 ​ 13,806 ​ — ​ 67,911 ​ ​ $ 100,112 ​ $ 13,806 ​ $ — ​ $ 113,918 ​ ​ 9 Table of Contents At November 20, 2021, the fair value measurement amounts for assets and liabilities recorded in the accompanying Condensed Consolidated Balance Sheets consisted of short-term marketable debt securities, which are included within Other current assets, and long-term marketable debt securities, which are included in Other long-term assets. The Company’s marketable debt securities are typically valued at the closing price in the principal active market as of the last business day of the quarter or through the use of other market inputs relating to the securities, including benchmark yields and reported trades. The fair values of the marketable debt securities, by asset class, are described in “Note D – Marketable Debt Securities.” Financial Instruments not Recognized at Fair Value The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in “Note F – Financing.” Note D – Marketable Debt Securities Marketable debt securities are carried at fair value, with unrealized gains and losses, net of income taxes, recorded in Accumulated other comprehensive loss until realized, and any credit risk related losses are recognized in net income in the period incurred. The Company’s basis for determining the cost of a security sold is the “Specific Identification Model.” ​ The Company’s available-for-sale marketable debt securities consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ November 20, 2021 ​ Amortized Gross Gross ​ ​ ​ Cost ​ Unrealized ​ Unrealized ​ Fair (in thousands) ​ Basis ​ Gains ​ Losses ​ Value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate debt securities ​ $ 20,956 ​ $ 196 ​ $ ( 26 ) ​ $ 21,126 Government bonds ​ 61,258 ​ 202 ​ ( 151 ) ​ 61,309 Mortgage-backed securities ​ 6,047 ​ 35 ​ ( 36 ) ​ 6,046 Asset-backed securities and other ​ 28,225 ​ 27 ​ ( 47 ) ​ 28,205 ​ ​ $ 116,486 ​ $ 460 ​ $ ( 260 ) ​ $ 116,686 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ August 28, 2021 ​ Amortized Gross Gross ​ ​ ​ Cost ​ Unrealized ​ Unrealized ​ Fair (in thousands) ​ Basis ​ Gains ​ Losses ​ Value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate debt securities ​ $ 23,650 ​ $ 329 ​ $ ( 2 ) ​ $ 23,977 Government bonds ​ 65,416 ​ 338 ​ ( 2 ) ​ 65,752 Mortgage-backed securities ​ 6,552 ​ 58 ​ ( 8 ) ​ 6,602 Asset-backed securities and other ​ 17,551 ​ 43 ​ ( 7 ) ​ 17,587 ​ ​ $ 113,169 ​ $ 768 ​ $ ( 19 ) ​ $ 113,918 10 Table of Contents ​ The debt securities held at November 20, 2021, had effective maturities ranging from less than one year to approximately four years . At November 20, 2021, the Company held 20 securities that are in an unrealized loss position of approximately $ 260 thousand. In evaluating whether a credit loss exists for the securities, the Company considers factors such as the severity of the loss position, the credit worthiness of the investee, the term to maturity and the intent and ability to hold the investments until maturity or until recovery of fair value. An allowance for credit losses was deemed unnecessary given consideration of the factors above. ​ Included above in total available-for-sale marketable debt securities are $ 92.8 million of marketable debt securities transferred by the Company’s insurance captive to a trust account to secure its obligations to an insurance company related to future workers’ compensation and casualty losses. Note E – Merchandise Inventories Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method stated at the lower of cost or net realizable value for domestic inventories and the weighted average cost method stated at the lower of cost or net realizable value for Mexico and Brazil inventories. Due to historical price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is not to write up inventory in excess of replacement cost. The difference between LIFO cost and replacement cost, which will be reduced upon experiencing price inflation on the Company’s merchandise purchases, was $ 312.7 million at November 20, 2021 and $ 335.3 million at August 28, 2021. ​ Note F – Financing The Company’s debt consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ November 20, August 28, (in thousands) ​ 2021 ​ 2021 ​ ​ ​ ​ ​ ​ ​ 3.700 % Senior Notes due April 2022 , effective interest rate of 3.85 % ​ $ 500,000 ​ $ 500,000 2.875 % Senior Notes due January 2023 , effective interest rate of 3.21 % ​ 300,000 ​ 300,000 3.125 % Senior Notes due July 2023 , effective interest rate of 3.26 % ​ 500,000 ​ 500,000 3.125 % Senior Notes due April 2024 , effective interest rate 3.32 % ​ 300,000 ​ 300,000 3.250 % Senior Notes due April 2025 , effective interest rate 3.36 % ​ 400,000 ​ 400,000 3.625 % Senior Notes due April 2025 , effective interest rate 3.78 % ​ ​ 500,000 ​ ​ 500,000 3.125 % Senior Notes due April 2026 , effective interest rate of 3.28 % ​ 400,000 ​ 400,000 3.750 % Senior Notes due June 2027 , effective interest rate of 3.83 % ​ 600,000 ​ 600,000 3.750 % Senior Notes due April 2029 , effective interest rate of 3.86 % ​ 450,000 ​ 450,000 4.000 % Senior Notes due April 2030 , effective interest rate 4.09 % ​ ​ 750,000 ​ ​ 750,000 1.650 % Senior Notes due January 2031 , effective interest rate of 2.19 % ​ ​ 600,000 ​ ​ 600,000 Total debt before discounts and debt issuance costs ​ 5,300,000 ​ 5,300,000 Less: Current portion of debt ​ 500,000 ​ — Less: Discounts and debt issuance costs ​ ​ 28,734 ​ 30,180 Debt, less current portion ​ $ 4,771,266 ​ $ 5,269,820 ​ On November 15, 2021, the Company amended and restated its existing revolving credit facility (the “Revolving Credit Agreement”) pursuant to which the Company’s borrowing capacity was increased from $ 2.0 billion to $ 2.25 billion and the maximum borrowing under the Revolving Credit Agreement may, at the Company’s option, subject to lenders approval, be increased from $ 2.25 billion to $ 3.25 billion. The Revolving Credit Agreement will terminate, and all amounts borrowed will be due and payable on November 15, 2026 , but AutoZone may make up to two requests to extend the termination date for an additional period of one year each. Revolving borrowings under the Revolving Credit Agreement may be base rate loans, Eurodollar loans, or a combination of both, at AutoZone’s election. The Revolving Credit Agreement includes (i) a $ 75 million sublimit for swingline loans, (ii) a $ 50 million individual issuer letter of credit sublimit and (iii) a $ 250 million aggregate sublimit for all letters of credit. 11 Table of Contents Under the Company’s 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. As of November 20, 2021, the Company had no outstanding borrowings, $ 1.8 million of outstanding letters of credit and $ 2.2 billion of availability under the Revolving Credit Agreement. As of November 20, 2021, the $ 500 million 3.700 % Senior Notes due April 2022 are classified as current in the accompanying Condensed Consolidated Balance Sheets as the Company has the intent to utilize operating cash to fund the payment. ​ 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 the Company experiences a change in control (as defined in the agreements). The Company’s borrowings under its Senior Notes contain minimal covenants, primarily restrictions on liens, sale and leaseback transactions and consolidations, mergers and the sale of assets. All of the repayment obligations under its borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs. ​ The fair value of the Company’s debt was estimated at $ 5.6 billion as of November 20, 2021, and $ 5.7 billion as of August 28, 2021, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same terms (Level 2). Such fair value is greater than the carrying value of debt by $ 306.0 million and $ 413.1 million at November 20, 2021 and August 28, 2021, respectively, which reflects their face amount, adjusted for any unamortized debt issuance costs and discounts. As of November 20, 2021, the Company was in compliance with all covenants and expects to remain in compliance with all covenants under its borrowing arrangements. Note G – Stock Repurchase Program From January 1, 1998 to November 20, 2021, the Company has repurchased a total of 150.8 million shares of its common stock at an aggregate cost of $ 26.6 billion, including 514,534 shares of its common stock at an aggregate cost of $ 900.0 million during the twelve week period ended November 20, 2021. On October 5, 2021, the Board voted to authorize the repurchase of an additional $ 1.5 billion of the Company’s common stock in connection with the Company’s ongoing share repurchase program. Since the inception of the repurchase program in 1998, the Board has authorized $ 27.7 billion in share repurchases. Considering the cumulative repurchases as of November 20, 2021, the Company had $ 1.0 billion remaining under the Board’s authorization to repurchase its common stock. Subsequent to November 20, 2021 and through December 10, 2021, the Company has repurchased 63,909 shares of its common stock at an aggregate cost of $ 120.0 million. On December 14, 2021, the Board voted to increase the authorization by $ 1.5 billion to raise the cumulative share repurchase authorization to $ 29.2 billion. Considering the cumulative repurchases subsequent to November 20, 2021 and through December 10, 2021 and the December 14, 2021 additional authorization, the Company has $ 2.4 billion remaining under the Board’s authorization to repurchase its common stock. Note H – Accumulated Other Comprehensive Loss Accumulated other comprehensive loss includes foreign currency translation adjustments, activity for interest rate swaps and treasury rate locks that qualify as cash flow hedges and unrealized gains (losses) on available-for-sale debt securities. ​ 12 Table of Contents Changes in Accumulated other comprehensive loss for the twelve week periods ended November 20, 2021 and November 21, 2020 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net ​ ​ ​ ​ ​ ​ ​ ​ Foreign ​ Unrealized ​ ​ ​ ​ ​ ​ ​ ​ Currency and ​ Gain (Loss) ​ ​ ​ ​ ​ ​ (in thousands) Other (1) on Securities ​ Derivatives ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at August 28, 2021 ​ $ ( 287,638 ) ​ $ 589 ​ $ ( 20,937 ) ​ $ ( 307,986 ) Other comprehensive (loss) before reclassifications (2)(3) ​ ( 16,566 ) ​ ( 430 ) ​ — ​ ( 16,996 ) Amounts reclassified from Accumulated other comprehensive loss (2)(3) ​ — ​ — ​ 655 ​ 655 Balance at November 20, 2021 ​ $ ( 304,204 ) ​ $ 159 ​ $ ( 20,282 ) ​ $ ( 324,327 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net ​ ​ ​ ​ ​ ​ ​ ​ Foreign ​ Unrealized ​ ​ ​ ​ ​ ​ ​ ​ Currency and ​ Gain (Loss) ​ ​ ​ ​ ​ ​ (in thousands) Other (1) on Securities ​ Derivatives ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at August 29, 2020 ​ $ ( 332,321 ) ​ $ 1,845 ​ $ ( 23,776 ) ​ $ ( 354,252 ) Other comprehensive income (loss) before reclassifications (2)(3) ​ 46,995 ​ ( 322 ) ​ — ​ 46,673 Amounts reclassified from Accumulated other comprehensive loss (2)(3) ​ — ​ 13 ​ 659 ​ 672 Balance at November 21, 2020 ​ $ ( 285,326 ) ​ $ 1,536 ​ $ ( 23,117 ) ​ $ ( 306,907 ) ​ (1) Foreign currency is shown net of U.S. tax to account for foreign currency impacts of certain undistributed non-U.S. subsidiaries earnings. Other foreign currency is not shown net of additional U.S. tax as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested. (2) Amounts in parentheses indicate debits to Accumulated Other Comprehensive Loss. (3) Amounts shown are net of tax. Note I – Litigation The Company is involved in various legal proceedings incidental to the conduct of its business, including, but not limited to, several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices. While the resolution of these matters cannot be predicted with certainty, management does not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets or Condensed Consolidated Statements of Cash Flows. Note J – Segment Reporting The Company’s operating segments (Domestic Auto Parts, Mexico and Brazil) are aggregated as one reportable segment: Auto Parts Stores. The criteria the Company used to identify the reportable segment are primarily the nature of the products the Company sells and the operating results that are regularly reviewed by the Company’s chief operating decision maker to make decisions about the resources to be allocated to the business units and to assess performance. The accounting policies of the Company’s reportable segment are the same as those described in “Note A – Significant Accounting Policies” in its Annual Report on Form 10-K for the year ended August 28, 2021. The Auto Parts Stores segment is a retailer and distributor of automotive parts and accessories through the Company’s 6,785 locations in the U.S., Mexico and Brazil. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. ​ 13 Table of Contents The Other category reflects business activities of two operating segments that are not separately reportable due to the materiality of these operating segments. The operating segments include ALLDATA, which produces, sells and maintains diagnostic and repair information software used in the automotive repair industry and E-commerce, which includes direct sales to customers through www.autozone.com for sales that are not fulfilled by local stores. The Company evaluates its reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. Segment results for the periods presented were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Weeks Ended ​ November 20, November 21, (in thousands) ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ ​ Net Sales ​ ​ Auto Parts Stores ​ $ 3,605,508 ​ $ 3,101,597 Other ​ 63,396 ​ 52,664 Total ​ $ 3,668,904 ​ $ 3,154,261 ​ ​ ​ ​ ​ ​ ​ Segment Profit ​ ​ Auto Parts Stores ​ $ 1,887,453 ​ $ 1,639,904 Other ​ 37,707 ​ 35,713 Gross profit ​ 1,925,160 ​ 1,675,617 Operating, selling, general and administrative expenses ​ ( 1,170,675 ) ​ ( 1,060,392 ) Interest expense, net ​ ( 43,284 ) ​ ( 46,179 ) Income before income taxes ​ $ 711,201 ​ $ 569,046 ​ ​ ​ ​ ​ ​ 14 Table of Contents Report of Independent Registered Public Accounting Firm ​ ​ To the Stockholders and Board of Directors of AutoZone, Inc. ​ Results of Review of Interim Financial Statements We have reviewed the accompanying condensed consolidated balance sheet of AutoZone, Inc. (the Company) as of November 20, 2021, the related condensed consolidated statements of income, comprehensive income, stockholders’ deficit and cash flows for the twelve week periods ended November 20, 2021 and November 21, 2020, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles. ​ We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of August 28, 2021, the related consolidated statements of income, comprehensive income, stockholders’ deficit and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated October 25, 2021, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of August 28, 2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ​ Basis for Review Results These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. ​ /s/ Ernst & Young LLP ​ ​ Memphis, Tennessee December 17, 2021 ​ ​ 15 Table of Contents