Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect the future results of AutoZone, Inc. (“AutoZone” or the “Company”). The following MD&A discussion should be read in conjunction with our Condensed Consolidated Financial Statements, related notes to those statements and other financial information, including forward-looking statements and risk factors, that appear elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended August 28, 2021 and other filings we make with the SEC.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “seek,” “may,” “could,” and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation: product demand, due to changes in fuel prices, miles driven or otherwise; energy prices; weather; competition; credit market conditions; cash flows; access to available and feasible financing; future stock repurchases; the impact of recessionary conditions; consumer debt levels; changes in laws or regulations; risks associated with self -insurance; war and the prospect of war, including terrorist activity; the impact of public health issues, such as the ongoing global coronavirus (“COVID-19”) pandemic; inflation; the ability to hire, train and retain qualified employees; construction delays; the compromising of confidentiality, availability or integrity of information, including due to cyber-attacks; historic growth rate sustainability; downgrade of our credit ratings; damage to our reputation; challenges in international markets; failure or interruption of our information technology systems; origin and raw material costs of suppliers; inventory availability; disruption in our supply chain; impact of tariffs; anticipated impact of new accounting standards; and business interruptions. Certain of these risks and uncertainties are discussed in more detail in the “Risk Factors” section contained in Item 1A under Part 1 of our Annual Report on Form 10-K for the year ended August 28, 2021, and these Risk Factors should be read carefully. Forward-looking statements are not guarantees of future performance, actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the “Risk Factors” could materially and adversely affect our business. However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward-looking statements. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are the leading retailer and distributor of automotive replacement parts and accessories in the Americas. We began operations in 1979 and at February 12, 2022, operated 6,091 stores in the U.S., 669 stores in Mexico and 55 stores in Brazil. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. At February 12, 2022, in 5,233 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. We also have commercial programs in all stores in Mexico and Brazil. We 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. We also provide product information on our Duralast branded products through www.duralastparts.com. We do not derive revenue from automotive repair or installation services.
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Operating results for the twelve and twenty-four weeks ended February 12, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending August 27, 2022. Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarters of fiscal 2022 and 2021 each have 16 weeks. Our business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September, and the lowest sales generally occurring in the months of December and January.
COVID-19 Impact
The COVID-19 pandemic continues to impact the global economy and numerous aspects of our business including our customers, employees and suppliers. Our highest priority remains the safety and well-being of our customers and employees. Since the beginning of the COVID-19 pandemic, we have experienced strong same store sales growth and our sales have remained at all-time high volumes.
The long-term impact of COVID-19 to our business remains unknown, may magnify risks associated with our business and operations and may continue to cause fluctuations in demand and availability for our products, our store hours and our workforce availability.
Please refer to the “Risk Factors” section of our Annual report on Form 10-K for the year ended August 28, 2021 for additional information.
Executive Summary
Net sales increased 15.8% for the quarter ended February 12, 2022 compared to the prior year period, which was driven by an increase in domestic same store sales (sales from stores open at least one year) of 13.8%. Domestic commercial sales increased 32.1%, which represents approximately 25% of our total sales. Operating profit increased 30.1% to $626.8 million compared to $481.8 million. Net income for the quarter increased 36.4% to $471.8 million compared to $345.9 million. Diluted earnings per share increased 49.4% to $22.30 per share from $14.93 per share. The increase in net income for the quarter ended February 12, 2022 was driven by strong topline growth and operating expense leverage.
Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to inflation, fuel costs, wage rates, supply chain disruptions, hiring and other economic conditions, including the effects of, and responses to, the ongoing COVID-19 pandemic. Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.
During the second quarter of fiscal 2022, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 84% of total sales, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix. We did not experience any fundamental shifts in our category sales mix as compared to the previous year. Our sales mix can be impacted by severe or unusual weather over a short-term period. Over the long-term, we believe the impact of the weather on our sales mix is not significant.
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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. While over the long-term we have seen a close correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road. The average age of the U.S. light vehicle fleet continues to trend in our industry’s favor as the average age has exceeded 11 years since 2012, 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. Since the beginning of the fiscal year and through December 2021 (latest publicly available information), miles driven in the U.S. increased 9.6% compared to the same period in the prior year. We believe the increase in miles driven is due to the nation beginning to return to pre-pandemic levels, but we are unable to predict if the increase will continue or the extent of the impact it will have on our business.
Twelve Weeks Ended February 12, 2022
Compared with Twelve Weeks Ended February 13, 2021
Net sales for the twelve weeks ended February 12, 2022 increased $458.9 million to $3.4 billion, or 15.8% over net sales of $2.9 billion for the comparable prior year period. Total auto parts sales increased by 15.6%, primarily driven by an increase in domestic same store sales of 13.8% and net sales of $64.9 million from new stores. Domestic commercial sales increased $205.0 million to $843.9 million, or 32.1%, over the comparable prior year period.
Gross profit for the twelve weeks ended February 12, 2022 was $1.8 billion, compared with $1.6 billion during the comparable prior year period. Gross profit, as a percentage of sales, was 53.0% compared to 53.6% during the comparable prior year period. The decrease in gross margin was primarily driven by initiatives to accelerate commercial business growth.
Operating, selling, general and administrative expenses for the twelve weeks ended February 12, 2022 were $1.2 billion, or 34.4% of net sales, compared with $1.1 billion, or 37.0% of net sales during the comparable prior year period. The decrease in operating expenses, as a percentage of sales, was driven by strong sales growth and approximately $40 million (137 basis points) in prior year pandemic related expenses, including Emergency Time-Off (“ETO”) for our AutoZoners.
Net interest expense for the twelve weeks ended February 12, 2022 was $42.5 million compared with $46.0 million during the comparable prior year period. Average borrowings for the twelve weeks ended February 12, 2022 were $5.6 billion, compared with $5.5 billion for the comparable prior year period. Weighted average borrowing rates were 3.29% and 3.27% for the quarter ended February 12, 2022 and February 13, 2021, respectively.
Our effective income tax rate was 19.3% of pretax income for the twelve weeks ended February 12, 2022, and 20.6% for the comparable prior year period. The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during the twelve weeks ended February 12, 2022. The benefit of stock options exercised for the twelve weeks ended February 12, 2022 was $23.4 million compared to $11.6 million in the comparable prior year period.
Net income for the twelve week period ended February 12, 2022 increased by $125.8 million to $471.8 million from $345.9 million in the comparable prior year period, and diluted earnings per share increased by 49.4% to $22.30 from $14.93. The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $1.89.
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Twenty-Four Weeks Ended February 12, 2022
Compared with Twenty-Four Weeks Ended February 13, 2021
Net sales for the twenty-four weeks ended February 12, 2022 increased $973.6 million to $7.0 billion, or 16.1% over net sales of $6.1 billion for the comparable prior year period. Total auto parts sales increased by 15.9%, primarily driven by an increase in domestic same store sales of 13.7% and net sales of $136.2 million from new stores. Domestic commercial sales increased $409.6 million to $1.7 billion, or 30.7%, over the comparable prior year period.
Gross profit for the twenty-four weeks ended February 12, 2022 was $3.7 billion, compared with $3.2 billion during the comparable prior year period. Gross profit, as a percentage of sales was 52.7% compared to 53.3% during the comparable prior year period. The decrease in gross margin was primarily driven by initiatives to accelerate commercial business growth.
Operating, selling, general and administrative expenses for the twenty-four weeks ended February 12, 2022 were $2.3 billion, or 33.1% of net sales, compared with $2.1 billion, or 35.3% of net sales during the comparable prior year period. The decrease in operating expenses, as a percentage of sales, was driven by strong sales growth and approximately $45 million (74 basis points) in prior year pandemic related expenses, including ETO for our AutoZoners.
Net interest expense for the twenty-four weeks ended February 12, 2022 was $85.8 million compared with $92.2 million during the comparable prior year period. Average borrowings for the twenty-four weeks ended February 12, 2022 were $5.4 billion, compared with $5.5 billion for the comparable prior year period. Weighted average borrowing rates were 3.29% and 3.27% for the twenty-four week periods ended February 12, 2022 and February 13, 2021, respectively.
Our effective income tax rate was 20.7% of pretax income for the twenty-four weeks ended February 12, 2022, and 21.5% for the comparable prior year period. The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during the twenty-four weeks ended February 12, 2022. The benefit of stock options exercised for the twenty-four week period ended February 12, 2022 was $34.7 million compared to $19.2 million in the comparable prior year period.
Net income for the twenty-four week period ended February 12, 2022 increased by $238.6 million to $1.0 billion from $788.4 million in the comparable prior year period, and diluted earnings per share increased by 43.0% to $48.03 from $33.59. The impact on current year to date diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $1.64.
Liquidity and Capital Resources
The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories. Our cash flow results benefitted from the quarters strong sales and continued progress on our initiatives. We believe that our cash generated from operating activities 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 February 12, 2022, we held $239.4 million of cash and cash equivalents, as well as $2.2 billion in undrawn capacity on our Revolving Credit Agreement, before giving effect to commercial paper borrowings. 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. However, decreased demand for our products or changes in customer buying patterns would negatively impact our ability to generate cash from operating activities. Decreased demand or changes in buying patterns could also impact our ability to meet our debt covenants of our credit agreements and, therefore, negatively impact the funds available under our Revolving Credit Agreement. In the event our liquidity is insufficient, we may be required to limit our spending.
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For the twenty-four weeks ended February 12, 2022, our net cash flows from operating activities provided $1.1 billion compared with $1.0 billion during the comparable prior year period. The increase is primarily due to growth in net income due to accelerated sales growth. The increase was partially offset by unfavorable changes in merchandise inventories, driven by higher sustained inventory purchase volume in the current period as compared to the same period in the prior year, and a decrease in accrued benefits and withholdings in the current period, as compared to the same period in the prior year due to the ability to defer certain payroll tax payments in the prior year under the Coronavirus Aid, Relief, and Economic Security Act.
Our net cash flows used in investing activities for the twenty-four weeks ended February 12, 2022 were $211.3 million as compared with $228.4 million in the comparable prior year period. Capital expenditures for the twenty-four weeks ended February 12, 2022 were $208.1 million compared to $238.6 million in the comparable prior year period. The decrease is primarily driven by decreased store openings. During the twenty-four week period ended February 12, 2022 and February 13, 2021, we opened 48 and 76 net new stores, respectively. Investing cash flows were impacted by our wholly owned captive, which purchased $22.6 million and sold $13.9 million in marketable debt securities during the twenty-four weeks ended February 12, 2022. During the comparable prior year period, the captive purchased $48.4 million in marketable debt securities and sold $60.6 million.
Our net cash flows used in financing activities for the twenty-four weeks ended February 12, 2022 were $1.9 billion compared to $1.5 billion in the comparable prior year period. Stock repurchases were $2.5 billion in the current twenty-four week period as compared with $1.6 billion in the prior year period. The treasury stock repurchases were primarily funded by cash flows from operations. D uring the twenty-four weeks ended February 12, 2022 , we repaid our $500 million 3.700% Senior Notes due April 2022, which were callable at par in January 2022. For the twenty-four week period ended February 12, 2022, our commercial paper activity resulted in $1.1 billion in net proceeds from commercial paper compared to no commercial paper borrowings in the prior year period. Proceeds from the sale of common stock and exercises of stock options provided $66.5 million for both of the twenty-four weeks ended February 12, 2022 and February 13, 2021, respectively.
During fiscal 2022, we expect to increase the investment in our business as compared to fiscal 2021. 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 international 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 initial lower investment) and whether such buildings are located in the U.S., Mexico or Brazil, or located in urban or rural areas.
In addition to the building and land costs, our new stores require working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio. We plan to continue leveraging our inventory purchases; however, our ability to do so may be limited by our vendors’ capacity to factor their receivables from us. Certain vendors participate in arrangements with financial institutions whereby they factor their AutoZone receivables, allowing them to receive early payment from the financial institution on our invoices at a discounted rate. The terms of these agreements are between the vendor and the financial institution. Upon request from the vendor, we confirm to the vendor’s financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances. A downgrade in our credit or changes in the financial markets may limit the financial institutions’ willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms. A reduction in payment terms would increase the working capital required to fund future inventory investments. Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio. Accounts payable, as a percentage of gross inventory, was 126.8% at February 12, 2022, compared to 113.0% at February 13, 2021. The increase from the comparable prior year period was primarily due to increased purchases with favorable vendor terms and higher inventory turns.
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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 based on our current credit ratings and favorable experiences in the debt markets in the past.
For the trailing four quarters ended February 12, 2022, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 49.4% as compared to 36.0% 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.
Debt Facilities
On November 15, 2021, we amended and restated our existing revolving credit facility (the “Revolving Credit Agreement”) pursuant to which our borrowing capacity under the Revolving Credit Agreement was increased from $2.0 billion to $2.25 billion and the maximum borrowing under the Revolving Credit Agreement may, at our 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 we 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 our 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.
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.
As of February 12, 2022, we had no outstanding borrowings and $1.8 million of outstanding letters of credit under our Revolving Credit Agreement.
We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of $25 million. The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement. As of February 12, 2022, 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 $105.1 million in letters of credit outstanding as of February 12, 2022. These letters of credit have various maturity dates and were issued on an uncommitted basis.
On January 18, 2022, we repaid the $500 million 3.700% Senior Notes due April 2022, which were callable at par in January 2022.
As of February 12, 2022, our $1.1 billion of commercial paper borrowings and the $300 million 2.875% Senior Notes due January 2023 were classified as long-term in the Consolidated Balance Sheets, as we have the current ability and intent to refinance them on a long-term basis through available capacity in our Revolving Credit Agreement. As of February 12, 2022, we had $2.2 billion of availability under our Revolving Credit Agreement, without giving effect to commercial paper borrowings, which would allow us to replace these short-term obligations with a long-term financing facility.
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All Senior Notes are subject to an interest rate adjustment if the debt ratings assigned are downgraded (as defined in the agreements). Further, the Senior Notes contain a provision that repayment may be accelerated if we experience a change in control (as defined in the agreements). Our borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens, sale and leaseback transactions and consolidations, mergers and the sale of assets. All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default occurs. As of February 12, 2022, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.
Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.0:1 as of February 12, 2022 and was 2.3:1 as of February 13, 2021. We calculate adjusted debt as the sum of total debt, financing lease liabilities and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent, and share-based compensation expense to net income. Adjusted debt to EBITDAR is calculated on a trailing four quarter basis. We target our debt levels to a ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings. We believe this is important information for the management of our debt levels. 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.
Stock Repurchases
From January 1, 1998 to February 12, 2022, we have repurchased a total of 151.6 million shares of our common stock at an aggregate cost of $28.2 billion, including 1.3 million shares of our common stock at an aggregate cost of $2.5 billion during the twenty-four week period ended February 12, 2022.
On December 14, 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, which raised the total value of our shares authorized to be repurchased to $29.2 billion. Considering the cumulative repurchases as of February 12, 2022, we had $957.6 million remaining under the Board’s authorization to repurchase our common stock.
Subsequent to February 12, 2022 and through March 11, 2022, we have repurchased 119,542 shares of our common stock at an aggregate cost of $226.9 million.
Off-Balance Sheet Arrangements
Since our fiscal year end, we have canceled, issued and modified stand-by letters of credit that are primarily renewed on an annual basis to cover deductible payments to our casualty insurance carriers. Our total stand-by letters of credit commitment at February 12, 2022, was $131.9 million, compared with $162.4 million at August 28, 2021, and our total surety bonds commitment at February 12, 2022, was $36.4 million, compared with $35.4 million at August 28, 2021.
Financial Commitments
Except for the previously discussed Revolving Credit Agreement and the repayment of the $500 million 3.700% Senior Notes due April 2022, as of February 12, 2022, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 28, 2021.
Reconciliation of Non-GAAP Financial Measures
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain financial measures not derived in accordance with GAAP. These non-GAAP financial measures provide additional information for determining our optimal capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders’ value.
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Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented non-GAAP financial measures, as we believe they provide additional information that is useful to investors as it indicates more clearly our comparative year-to-year operating results. Furthermore, our management and the Compensation Committee of the Board use these non-GAAP financial measures to analyze and compare our underlying operating results and use select measurements to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables.
Reconciliation of Non-GAAP Financial Measure: Adjusted After-Tax ROIC
The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended February 12, 2022 and February 13, 2021.
A
B
A-B=C
D
C+D
Fiscal Year
Twenty-Four
Twenty-Eight
Twenty-Four
Trailing Four
Ended
Weeks Ended
Weeks Ended
Weeks Ended
Quarters Ended
August 28,
February 13,
August 28,
February 12,
February 12,
(in thousands, except percentage)
2021
2021
2021
2022
2022
Net income
$
2,170,314
$
788,379
$
1,381,935
$
1,026,990
$
2,408,925
Adjustments:
Interest expense
195,337
92,191
103,146
85,755
188,901
Rent expense (1)
345,380
156,937
188,443
165,967
354,410
Tax effect (2)
(112,469)
(51,819)
(60,650)
(52,358)
(113,008)
Adjusted after-tax return
$
2,598,562
$
985,688
$
1,612,874
$
1,226,354
$
2,839,228
Average debt (3)
$
5,433,252
Average stockholders’ deficit (3)
(2,069,346)
Add: Rent x 6 (1)
2,126,460
Average finance lease liabilities (3)
255,497
Invested capital
$
5,745,863
Adjusted after-tax ROIC
49.4
%
A
B
A-B=C
D
C+D
Fiscal Year
Twenty-Four
Twenty-Eight
Twenty-Four
Trailing Four
Ended
Weeks Ended
Weeks Ended
Weeks Ended
Quarters Ended
August 29,
February 15,
August 29,
February 13,
February 13,
(in thousands, except percentage)
2020
2020
2020
2021
2021
Net income
$
1,732,972
$
649,620
$
1,083,352
$
788,379
$
1,871,731
Adjustments:
Interest expense
201,165
88,078
113,087
92,191
205,278
Rent expense (1)
329,783
150,751
179,032
156,937
335,969
Tax effect (2)
(117,340)
(52,781)
(64,559)
(55,057)
(119,616)
Adjusted after-tax return
$
2,146,580
$
835,668
$
1,310,912
$
982,450
$
2,293,362
Average debt (3)
$
5,482,877
Average stockholders' deficit (3)
(1,354,477)
Add: Rent x 6 (1)
2,015,814
Average finance lease liabilities (3)
220,550
Invested capital
$
6,364,764
Adjusted after-tax ROIC
36.0
%
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Reconciliation of Non-GAAP Financial Measure: Adjusted Debt to EBITDAR
The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended February 12, 2022 and February 13, 2021.
A
B
A-B=C
D
C+D
Fiscal Year
Twenty-Four
Twenty-Eight
Twenty-Four
Trailing Four
Ended
Weeks Ended
Weeks Ended
Weeks Ended
Quarters Ended
August 28,
February 13,
August 28,
February 12,
February 12,
(in thousands, except ratio)
2021
2021
2021
2022
2022
Net income
$
2,170,314
$
788,379
$
1,381,935
$
1,026,990
$
2,408,925
Add: Interest expense
195,337
92,191
103,146
85,755
188,901
Income tax expense
578,876
216,422
362,454
268,500
630,954
EBIT
2,944,527
1,096,992
1,847,535
1,381,245
3,228,780
Add: Depreciation and amortization expense
407,683
184,027
223,656
199,282
422,938
Rent expense (1)
345,380
156,937
188,443
165,967
354,410
Share-based expense
56,112
24,178
31,934
30,738
62,672
Adjusted EBITDAR
$
3,753,702
$
1,462,134
$
2,291,568
$
1,777,232
$
4,068,800
Debt
$
5,840,884
Financing lease liabilities
272,719
Add: Rent x 6 (1)
2,126,460
Adjusted debt
$
8,240,063
Adjusted debt to EBITDAR
2.0
A
B
A-B=C
D
C+D
Fiscal Year
Twenty-Four
Twenty-Eight
Twenty-Four
Trailing Four
Ended
Weeks Ended
Weeks Ended
Weeks Ended
Quarters Ended
August 29,
February 15,
August 29,
February 13,
February 13,
(in thousands, except ratio)
2020
2020
2020
2021
2021
Net income
$
1,732,972
$
649,620
$
1,083,352
$
788,379
$
1,871,731
Add: Interest expense
201,165
88,078
113,087
92,191
205,278
Income tax expense
483,542
170,263
313,279
216,422
529,701
EBIT
2,417,679
907,961
1,509,718
1,096,992
2,606,710
Add: Depreciation and amortization expense
397,466
180,420
217,046
184,027
401,073
Rent expense (1)
329,783
150,751
179,032
156,937
335,969
Share-based expense
44,835
22,107
22,728
24,178
46,906
Adjusted EBITDAR
$
3,189,763
$
1,261,239
$
1,928,524
$
1,462,134
$
3,390,658
Debt
$
5,516,396
Financing lease liabilities
225,411
Add: Rent x 6 (1)
2,015,814
Adjusted debt
$
7,757,621
Adjusted debt to EBITDAR
2.3
(1) 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 trailing four quarters ended February 12, 2022 and February 13, 2021 .
Trailing Four Quarters Ended
(in thousands)
February 12, 2022
February 13, 2021
Total lease cost, per ASC 842
$
442,950
$
418,100
Less: Finance lease interest and amortization
(62,607)
(55,880)
Less: Variable operating lease components, related to insurance and common area maintenance
(25,933)
(26,251)
Rent expense
$
354,410
$
335,969
(2) Effective tax rate over trailing four quarters ended February 12, 2022 and February 13, 2021 is 20.8% and 22.1%, respectively.
(3) All averages are computed based on trailing five quarter balances.
24
Table of Contents
Recent Accounting Pronouncements
Refer to Note A of the Notes to Condensed Consolidated Financial Statements for the discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 28, 2021. There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended August 28, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.