Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, we use various derivative instruments to reduce interest rate and fuel price risks. To date, based upon our current level of foreign operations, no derivative instruments have been utilized to reduce foreign exchange rate risk. All of our hedging activities are governed by guidelines that are authorized by the Board. Further, we do not buy or sell derivative instruments for trading purposes.
Interest Rate Risk
Our financial market risk results primarily from changes in interest rates. At times, we reduce our exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and forward-starting interest rate swaps.
We have historically utilized interest rate swaps to convert variable rate debt to fixed rate debt and to lock in fixed rates on future debt issuances. We reflect the current fair value of all interest rate hedge instruments as a component of either other current assets or accrued expenses and other. Our interest rate hedge instruments are designated as cash flow hedges. As of August 27, 2022 and August 28, 2021, no such interest rate swaps were outstanding.
Unrealized gains and losses on interest rate hedges are deferred in stockholders’ deficit as a component of Accumulated Other Comprehensive Loss. These deferred gains and losses are recognized in income as a decrease or increase to interest expense in the period in which the related cash flows being hedged are recognized in expense. However, to the extent that the change in value of an interest rate hedge instrument does not perfectly offset the change in the value of the cash flow being hedged, that ineffective portion is immediately recognized in earnings.
The fair value of our debt was estimated at $5.9 billion as of August 27, 2022, and $5.7 billion as of August 28, 2021, based on the quoted market prices for the same or similar debt issues or on the current rates available to us for debt having the same remaining maturities. Such fair value is less than the carrying value of debt by $182.8 million and greater than the carrying value of debt by $413.1 million at August 27, 2022 and August 28, 2021, respectively, which reflects its face amount, adjusted for any unamortized debt issuance costs and discounts.
We had $603.4 million in variable rate debt outstanding at August 27, 2022 and none in August 28, 2021.
We had outstanding fixed rate debt of $5.5 billion, net of unamortized debt issuance costs of $31.3 million, at August 27, 2022, and $5.3 billion, net of unamortized debt issuance costs of $30.2 million, at August 28, 2021. A one percentage point increase in interest rates would have reduced the fair value of our fixed rate debt by approximately $230.5 million at August 27, 2022.
Foreign Currency Risk
Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than our entities’ functional currencies. To minimize our risk, we generally enter into transactions denominated in the respective functional currencies. We are exposed to Brazilian reals, Canadian dollars, euros, Chinese yuan renminbi and British pounds, but our primary foreign currency exposure arises from Mexican peso-denominated revenues and profits and their translation into U.S. dollars. Foreign currency exposures arising from transactions denominated in currencies other than the functional currency are not material.
We view our investments in Mexican subsidiaries as long-term. As a result, we generally do not hedge these net investments. The net asset exposure in the Mexican subsidiaries translated into U.S. dollars using the year-end
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exchange rates was $270.2 million at August 27, 2022 and $310.1 million at August 28, 2021. The year-end exchange rates with respect to the Mexican peso decreased less than 1.0% with respect to the U.S. dollar during fiscal 2022 and increased by approximately 10% with respect to the U.S. dollar during fiscal 2021. The potential loss in value of our net assets in the Mexican subsidiaries resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates at August 27, 2022 and August 28, 2021, would have been approximately $24.6 million and approximately $28.2 million, respectively. Any changes in our net assets in the Mexican subsidiaries relating to foreign currency exchange rates would be reflected in the foreign currency translation component of Accumulated Other Comprehensive Loss, unless the Mexican subsidiaries are sold or otherwise disposed. A hypothetical 10 percent adverse change in average exchange rates would not have a material impact on our results of operations.
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Item 8. Financial Statements and Supplementary Data
Index
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PART I Error! Bookmark not defined.
Item 1. Business Error! Bookmark not defined.
Introduction Error! Bookmark not defined.
Human Capital Resources Error! Bookmark not defined.
Store Operations Error! Bookmark not defined.
Store Formats Error! Bookmark not defined.
We believe our stores are “destination stores,” generating their own traffic rather than relying on traffic created by adjacent stores. Therefore, we situate most stores on major thoroughfares with easy access and good parking. Error! Bookmark not defined.
Store Personnel and Training Error! Bookmark not defined.
Store Support Centers Error! Bookmark not defined.
All store support functions are centralized in our store support centers located in Memphis, Tennessee; Monterrey, Mexico; Chihuahua, Mexico and Sao Paulo, Brazil. We believe that this centralization enhances consistent execution of our merchandising and marketing strategies at the store level, while reducing expenses and cost of sales. Error! Bookmark not defined.
Store Automation Error! Bookmark not defined.
Commercial Error! Bookmark not defined.
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Marketing and Merchandising Strategy Error! Bookmark not defined.
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Brand Marketing: Marketing and Loyalty Error! Bookmark not defined.
Purchasing and Supply Chain Error! Bookmark not defined.
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Information about our Executive Officers Error! Bookmark not defined.
William C. Rhodes, III, 57—Chairman, President and Chief Executive Officer, Customer Satisfaction Error! Bookmark not defined.
Preston B. Frazer, 46—Executive Vice President – Store Operations, Commercial and Loss Prevention, Customer Satisfaction Error! Bookmark not defined.
Thomas B. Newbern, 60—Executive Vice President – International, Information Technology and ALLDATA, Customer Satisfaction Error! Bookmark not defined.
Domingo J. Hurtado, 61—Senior Vice President – International, Customer Satisfaction Error! Bookmark not defined.
Kristen C. Wright, 46—Senior Vice President – General Counsel & Secretary, Customer Satisfaction Error! Bookmark not defined.
Item 1B. Unresolved Staff Comments Error! Bookmark not defined.
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PART II 24
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24
Stock Performance Graph 25
Item 6. Reserved Error! Bookmark not defined.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Error! Bookmark not defined.
Executive Summary Error! Bookmark not defined.
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. Error! Bookmark not defined.
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. Error! Bookmark not defined.
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Results of Operations Error! Bookmark not defined.
The following table highlights selected financial information over the past 5 years: Error! Bookmark not defined.
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(1) The fiscal year ended August 31, 2019 consisted of 53 weeks. Error! Bookmark not defined.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk Error! Bookmark not defined.
Interest Rate Risk Error! Bookmark not defined.
Foreign Currency Risk Error! Bookmark not defined.