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Item 7. Management’s Discussion and Analysis

2022-10-24 compared with 2021-10-25 · 74 added, 105 removed, 334 unchanged (35% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

We began operations in 1979 and at August 27, 2022, operated 6,168 stores in the U.S., 703 stores in Mexico and 72 stores in Brazil.

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

COVID-19 Impact

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 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.

For fiscal 2022, we achieved record net income of $2.4 billion, an 11.9% increase over the prior year, and sales growth of $1.6 billion, an 11.1% increase over the prior year.

Domestic commercial sales increased 26.5%, which represents 28.8% of our domestic auto parts sales.

Both our retail sales and commercial sales grew this past year as we made progress on our initiatives aimed at improving our ability to say “Yes” to our customers more frequently and accelerating 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 inflation, fuel costs, wage rates, supply chain disruptions, hiring and other economic conditions.

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

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

With approximately 10 billion gallons of unleaded gas consumption each month across the U.S., each $1 decrease at the pump contributes approximately $10 billion of additional spending capacity to consumers each month.

With approximately 11 billion gallons of unleaded gas consumption each month across the U.S., each $1 increase at the pump reduces approximately $11 billion of additional spending capacity to consumers each month.

Given the unpredictability of gas prices, we cannot predict whether gas prices will increase or decrease, nor can we predict how any future changes in gas prices will impact our sales in future periods.

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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 recently 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 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 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.

During fiscal 2022, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 84% of total sales 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 see a slight decrease in mix of sales of the discretionary category and a slight increase in the maintence category compared to last year.

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.

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Since the beginning of the fiscal year and through July 2022 (latest publicly available information), miles driven in the U.S.

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 of the impact it will have to our business.

increased by 4.6% compared to the same period in the prior year.

We believe this increase is due to the nation returning to pre-pandemic levels, but we are unable to predict if this increase will continue, due to rising fuel prices, general macroeconomic conditions, or otherwise, or the extent of the impact it will have on our business.

Seven Year Old or Older Vehicles

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.

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.

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.

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, 2021, the average age of light vehicles on the road was 12.1 years.

According to the latest data provided by the Auto Care Association, as of January 1, 2022, the average age of light vehicles on the road was 12.2 years and these vehicles account for more than 40% of U.S.

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:

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

Fiscal Year Ended August

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We reported a total auto parts segment (domestic, Mexico and Brazil) sales increase of 11.0% for fiscal 2022.

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.

Gross profit for fiscal 2022 was $8.5 billion, or 52.1% of net sales, a 62 basis point decrease compared with $7.7 billion, or 52.8% of net sales for fiscal 2021.

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 2022 increased to $5.2 billion, or 32.0% of net sales, from $4.8 billion, or 32.6% of net sales for fiscal 2021.

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

The increase 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 2022 was $191.6 million compared with $195.3 million during fiscal 2021.

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Weighted average borrowing rates were 3.29% and 3.28% for fiscal 2022 and 2021, respectively.

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

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

Our effective income tax rate was 21.1% of pre-tax income for fiscal 2022 and fiscal 2021.

The benefit of stock options exercised for fiscal 2022 was $63.2 million compared to $56.4 million for fiscal 2021 (see “Note D – Income Taxes” in the Notes to Consolidated Financial Statements).

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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 2021 and 2020 and 17 weeks in 2019.

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consisted of 16 weeks in 2022, 2021 and 2020.

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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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.

Continued progress on our initiatives improved our operating performance for the fiscal year.

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.

As of August 27, 2022, we held $264.4 million of cash and cash equivalents, as well as $2.2 billion in undrawn capacity on our revolving credit facility, without 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.

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Net cash provided by operating activities was $3.2 billion in 2022, $3.5 billion in 2021 and $2.7 billion in 2020.

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 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.

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.

Cash flows from operations are unfavorable compared to last year primarily due to higher inventory purchase volume.

Our net cash flows used in investing activities were $648.1 million, $601.8 million and $497.9 million in fiscal 2022, 2021 and 2020, respectively.

The increase in net cash used in investing activities in fiscal 2022 was primarily due to an increase in capital expenditures.

We invested $672.4 million, $621.8 million and $457.7 million in capital assets in fiscal 2022, 2021 and 2020, respectively.

The increase in capital expenditures from fiscal 2021 to fiscal 2022 was primarily driven by our growth initiatives, including hub and mega hub expansion projects and new stores.

We had net new store openings of 176, 218 and 138 for fiscal 2022, 2021 and 2020, respectively.

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

We purchased $63.7 million in marketable debt securities in fiscal 2021, $90.9 million in fiscal 2020 and $55.5 million in fiscal 2019.

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 $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.

We purchased marketable debt securities of $56.0 million, $63.7 million and $90.9 million in fiscal 2022, 2021 and 2020, respectively.

We had proceeds from the sale of marketable debt securities of $53.9 million, $95.4 million and $84.2 million in fiscal 2022, 2021 and 2020, respectively.

Net cash used in financing activities was $3.5 billion in fiscal 2022 and fiscal 2021 and $643.6 million in fiscal 2020.

The net cash used in financing activities reflected purchases of treasury stock, which totaled $4.4 billion, $3.4 billion and $930.9 million for fiscal 2022, 2021 and 2020, respectively.

The treasury stock purchases in fiscal 2022, 2021 and 2020 were primarily funded by cash flows from operations.

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.

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 the year ended August 27, 2022, we repaid our $500 million 3.700% Senior Notes due April 2022 and issued $750 million of new debt compared to none in 2021 and $1.850 billion in 2020.

In fiscal years 2022 and 2020 the proceeds from the issuance of debt were used for general corporate purposes.

The Company had net proceeds from the issuance of commercial paper and short term borrowing of $603.4 million during fiscal 2022.

We did not have any commercial paper or short term borrowing activity during fiscal 2021 and the Company had net repayments of commercial paper and short term borrowings of $1.0 billion for 2020.

During fiscal 2023, we expect to increase the investment in our business as compared to fiscal 2022.

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.

Our investments are expected to be directed primarily to our supply chain initiatives, which includes expanded hub and mega hubs, as well as distribution center expansions and new stores.

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.

During fiscal 2022, 2021 and 2020 our capital expenditures increased by approximately 8% and 36% and decreased 8%, respectively.

Fiscal 2021 capital expenditures increased 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.

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We had an accounts payable to inventory ratio of 129.5% at August 27, 2022 and 129.6% at August 28, 2021.

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.

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Debt Facilities

We entered into a Master Extension, New Commitment and Amendment Agreement dated as of November 18, 2017 (the “Extension Amendment”) to the Third Amended and Restated Credit Agreement dated as of November 18, 2016, as amended, modified, extended or restated from time to time (the “Revolving Credit Agreement”).

Under the Extension Amendment:

(i) our borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion;

(ii) the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from $2.0 billion to $2.4 billion;

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

and (iv) we have the option to make one additional written request of the lenders to extend the termination date then in effect for an additional year.

Under the Revolving Credit Agreement, we may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both.

Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon our senior, unsecured, (non-credit enhanced) long-term debt ratings.

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

As of 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.

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 August 27, 2022, we had no outstanding borrowings and $1.8 million of outstanding letters of credit under the Revolving Credit Agreement.

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 27, 2022 was 7.4:1.

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.

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 and had an expiration in June 2022.

On May 16, 2022, we amended and restated the letter of credit facility to, among other things, extend the facility through June 2025.

As of August 27, 2022, we had $23.6 million in letters of credit outstanding under the letter of credit facility.

In addition to the outstanding letters of credit issued under the committed facility discussed above, we had $105.1 million in letters of credit outstanding as of August 27, 2022.

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

As of August 27, 2022, our $603.4 million of commercial paper borrowings, the $300 million 2.875% Senior Notes due January 2023 and the $500 million 3.125% Senior Notes due July 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 facility.

As of August 27, 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.

On January 18, 2022, we repaid the $500 million 3.700% Senior Notes due April 2022, which were callable at par in January 2022.

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 1, 2022, we issued $750 million in 4.750% Senior Notes due August 2032 under our automatic shelf registration statement on Form S-3, filed with the SEC on July 19, 2022 (File No.

333-266209) (the “2022 Shelf Registration Statement”).

The 2022 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 or distribution center openings, stock repurchases and acquisitions.

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

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.

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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 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.

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).

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.

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As of August 27, 2022, 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.

For the fiscal year ended August 27, 2022, our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.1:1 as compared to 2.0:1 as of

the comparable prior year end.

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

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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 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.

On March 23, 2021, the Board voted to increase the repurchase authorization from $24.7 to $26.2 billion.

The Board voted to increase the repurchase authorization by $1.5 billion on October 5, 2021, $1.5 billion on December 15, 2021 and $2.0 billion on March 22, 2022, bringing the total authorization to $31.2 billion.

From January 1998 to August 27, 2022, we have repurchased a total of 152.5 million shares at an aggregate cost of $30.1 billion.

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.

We repurchased 2.2 million, 2.6 million and 826 thousand shares of common stock at an aggregate cost of $4.4 billion, $3.4 billion and $930.9 million during fiscal 2022, 2021 and 2020, respectively.

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 2022.

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

Considering cumulative repurchases as of August 27, 2022, we had $1.1 billion 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.

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Effect of exchange rate changes on cash

Net increase/(decrease) in cash and cash equivalents

Net (decrease)/increase in cash and cash equivalents

increase/(decrease) in debt, excluding deferred financing costs

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Income tax expense

Adjusted EBIT

Depreciation and amortization expense

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Share-based expense

Adjusted EBITDAR

Financing lease liabilities

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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 28, 2021 and August 29, 2020.

For the year ended

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August 28, 2021

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

August 29, 2020

Total lease cost, per ASC 842

Finance lease interest and amortization

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

Rent expense for the trailing four quarters

(4) For fiscal 2022, 2021, and 2020, the effective tax rate was 21.1%, 21.1%, and 21.8%, 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, 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.

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The actuarial methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date.

When estimating these liabilities, we consider factors, such as the severity, duration and frequency of claims, legal costs associated with claims, healthcare trends and projected inflation of related factors.

When estimating these liabilities, we consider factors, such as the severity, duration and frequency of claims, legal costs associated with claims, healthcare trends

and projected inflation of related factors.

In recent history, our methods for determining our exposure have remained consistent, and our historical trends have been appropriately factored into our reserve estimates.

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Arriving at these estimates, however, requires a significant amount of subjective judgment by management, and as a result these estimates are uncertain and our actual exposure may be different from our estimates.

For example, changes in our assumptions about healthcare costs, the severity of accidents and the incidence of illness, the average size of claims and other factors could cause actual claim costs to vary materially from our assumptions and estimates, causing our reserves to be overstated or understated.

For example, changes in our assumptions about healthcare costs, the severity of accidents and the incidence of illness, the average size of claims and other factors could cause actual claim costs to vary from our assumptions and estimates, causing our reserves to be overstated or understated.

For instance, a 10% change in our self-insurance liability would have affected net income by approximately $18.2 million for fiscal 2022.

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We believe our estimates to be reasonable and have not experienced material adjustments to our reserves in the previous three years;

however, actual results could differ from our estimates, and we may be exposed to gains or losses that could be material.

however, actual results could differ from our estimates, and we may be exposed to gains or losses.

Specifically, management has used judgment and made assumptions to estimate the likely outcome of uncertain tax positions.

Additionally, to the extent we prevail in matters for which a liability has been established, or must pay in excess of recognized reserves, our effective tax rate in any particular period could be materially affected.

Vendor Allowances

6 unchanged sentences

We generally have not recorded a reserve against these receivables as we have not experienced significant losses and typically have a legal right of offset with our vendors for payments owed them.

Historically, we have had write-offs less than $1 million in each of the last three years.

We have had write-offs less than $1 million in each of the last three years.

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