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Item 2. Management’s Discussion and Analysis

2022-12-20 compared with 2022-06-10 · 106 added, 105 removed, 169 unchanged (56% of the section changed)

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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.

Certain statements contained herein 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.

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construction delays;

the compromising of confidentiality, availability or integrity of information, including due to cyber-attacks;

failure or interruption of our information technology systems;

issues relating to the confidentiality, integrity or availability of information, including due to cyber-attacks;

historic growth rate sustainability;

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challenges in international markets;

failure or interruption of our information technology systems;

origin and raw material costs of suppliers;

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impact of tariffs;

anticipated impact of new accounting standards;

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 27, 2022, 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.

Forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements.

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.

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

We began operations in 1979 and at May 7, 2022, operated 6,115 stores in the U.S., 673 stores in Mexico and 58 stores in Brazil.

We began operations in 1979 and at November 19, 2022, operated 6,196 stores in the U.S., 706 stores in Mexico and 76 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 May 7, 2022, in 5,276 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.

At November 19, 2022, in 5,459 of our domestic stores, we 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 the majority of our stores in Mexico and Brazil.

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

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

Operating results for the twelve and thirty-six weeks ended May 7, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending August 27, 2022.

Our websites and the information contained therein or linked thereto are not intended to be incorporated into this report.

Operating results for the twelve weeks ended November 19, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending August 26, 2023.

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks.

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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, 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 5.9% for the quarter ended May 7, 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 2.6%.

Net sales increased 8.6% for the quarter ended November 19, 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 5.6%.

Domestic commercial sales increased 14.9%, which represents approximately 28.9% of our domestic auto parts sales.

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Diluted earnings per share increased 6.9% to $27.45 per share from $25.69 per share.

Our business is impacted by various factors within the economy that affect both our consumers 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.

The above results include an $81.0 million non-cash LIFO charge incurred in the current quarter.

Adjusting for the non-cash LIFO charge, adjusted operating profit increased 6.6%, adjusted net income increased 8.3% and adjusted diluted earnings per share increased 19.2% compared to the prior year period.

Management believes these non-GAAP financial measures are useful in providing quarter-to-quarter comparisons of the results of our operations.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section for a reconciliation of these non-GAAP measures to the most comparable GAAP measure .

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 third 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.

During the first quarter of fiscal 2023, failure and maintenance related categories represented the largest portion of our sales mix at approximately 86% of total sales, which is consistent with the comparable prior year period.

Failure related categories continue 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.

Over the long-term, we believe the impact of weather on our sales mix is not significant.

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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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, 2022, the average age of light vehicles on the road was 12.2 years, up from 12.1 years in 2021.

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

light vehicle fleet remains 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, 2022, the average age of light vehicles on the road was 12.2 years.

For September 2022 (latest publicly available information), miles driven in the U.S.

increased 1.0% 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, due to rising fuel prices, general macroeconomic conditions or otherwise, or the extent of the impact it will have on our business.

Twelve Weeks Ended May 7, 2022

Compared with Twelve Weeks Ended May 8, 2021

Net sales for the twelve weeks ended May 7, 2022 increased $214.2 million to $3.9 billion, or 5.9% over net sales of $3.7 billion for the comparable prior year period.

Twelve Weeks Ended November 19, 2022

Compared with Twelve Weeks Ended November 20, 2021

Net sales for the twelve weeks ended November 19, 2022 increased $316.2 million to $4.0 billion, or 8.6% over net sales of $3.7 billion for the comparable prior year period.

Total auto parts sales increased by 8.6%, primarily driven by an increase in domestic same store sales of 5.6% and net sales of $71.6 million from new stores.

Domestic commercial sales increased $134.4 million to $1.0 billion, or 14.9%, over the comparable prior year period.

Gross profit for the twelve weeks ended May 7, 2022 was $2.0 billion, compared with $1.9 billion during the comparable prior year period.

Gross profit for the twelve weeks ended November 19, 2022 was $2.0 billion, compared with $1.9 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 50.1% compared to 52.5% during the comparable prior year period.

The decrease in gross margin was primarily driven by accelerated growth in our lower margin commercial business.

Operating, selling, general and administrative expenses for the twelve weeks ended May 7, 2022 were $1.2 billion, or 31.6% of net sales, compared with $1.1 billion, or 30.4% of net sales during the comparable prior year period.

The increase in operating expenses, as a percentage of sales, was driven by payroll deleverage as last year’s historic comparable store sales drove significant leverage.

Net interest expense for the twelve weeks ended May 7, 2022 was $41.9 million compared with $45.0 million during the comparable prior year period.

Average borrowings for the twelve weeks ended May 7, 2022 were $6.0 billion, compared with $5.4 billion for the comparable prior year period.

Weighted average borrowing rates were 2.74% and 3.29% for the quarter ended May 7, 2022 and May 8, 2021, respectively.

Our effective income tax rate was 20.3% of pretax income for the twelve weeks ended May 7, 2022, and 21.4% 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 May 7, 2022.

The benefit of stock options exercised for the twelve weeks ended May 7, 2022 was $21.1 million compared to $16.0 million in the comparable prior year period.

Net income for the twelve week period ended May 7, 2022 decreased by $3.6 million to $592.6 million due to the factors set forth above, and diluted earnings per share increased by 9.6% to $29.03 from $26.48.

The decrease in gross margin was driven by a 203 basis point ($81.0 million) non-cash

LIFO charge driven primarily by rising freight costs, with the remaining deleverage primarily from accelerated growth in our commercial business.

Operating, selling, general and administrative expenses for the twelve weeks ended November 19, 2022 were $1.3 billion compared with $1.2 billion during the comparable prior year period.

As a percentage of sales, these expenses were flat to the prior year at 31.9%.

Net interest expense for the twelve weeks ended November 19, 2022 was $57.7 million compared with $43.3 million during the comparable prior year period.

Average borrowings for the twelve weeks ended November 19, 2022 were $6.2 billion, compared with $5.3 billion for the comparable prior year period.

Weighted average borrowing rates were 3.47% and 3.30% for the quarters ended November 19, 2022 and November 20, 2021, respectively.

Our effective income tax rate was 18.9% of pretax income for the twelve weeks ended November 19, 2022, and 21.9% 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 November 19, 2022.

The benefit of stock options exercised for the twelve weeks ended November 19, 2022 was $29.7 million compared to $11.3 million in the comparable prior year period.

Net income for the twelve week period ended November 19, 2022 decreased by $15.9 million to $539.3 million due to the factors set forth above, and diluted earnings per share increased by 6.9% to $27.45 from $25.69.

Excluding the non-cash LIFO charge, adjusted net income increased 8.3% to $601.5 million and adjusted diluted earnings per share increased 19.2% to $30.62.

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 $1.19.

Thirty-Six Weeks Ended May 7, 2022

Compared with Thirty-Six Weeks Ended May 8, 2021

Net sales for the thirty-six weeks ended May 7, 2022 increased $1.2 billion to $10.9 billion, or 12.2% over net sales of $9.7 billion for the comparable prior year period.

Total auto parts sales increased by 12.1%, primarily driven by an increase in domestic same store sales of 9.5% and net sales of $200.3 million from new stores.

Domestic commercial sales increased $625.3 million to $2.8 billion, or 28.9%, over the comparable prior year period.

Gross profit for the thirty-six weeks ended May 7, 2022 was $5.7 billion, compared with $5.1 billion during the comparable prior year period.

Gross profit, as a percentage of sales was 52.4% compared to 53.0% 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 thirty-six weeks ended May 7, 2022 were $3.5 billion, or 32.6% of net sales, compared with $3.2 billion, or 33.4% 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 $46 million in prior year pandemic related expenses, including Emergency Time-Off benefit enhancements for our AutoZoners.

Net interest expense for the thirty-six weeks ended May 7, 2022 was $127.6 million compared with $137.2 million during the comparable prior year period.

Average borrowings for the thirty-six weeks ended May 7, 2022 were $5.6 billion, compared with $5.5 billion for the comparable prior year period.

Weighted average borrowing rates were 3.03% and 3.28% for the thirty-six week periods ended May 7, 2022 and May 8, 2021, respectively.

Our effective income tax rate was 20.6% of pretax income for the thirty-six weeks ended May 7, 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 thirty-six weeks ended May 7, 2022.

The benefit of stock options exercised for the thirty-six week period ended May 7, 2022 was $55.9 million compared to $35.2 million in the comparable prior year period.

Net income for the thirty-six week period ended May 7, 2022 increased by $235.0 million to $1.6 billion due to the factors set forth above, and diluted earnings per share increased by 28.6% to $76.90 from $59.80.

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 $4.58.

Liquidity and Capital Resources

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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 May 7, 2022, we held $263.0 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.

As of November 19, 2022, we held $269.8 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.

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In the event our liquidity is insufficient, we may be required to limit our spending.

For the thirty-six weeks ended May 7, 2022, our net cash flows from operating activities provided $2.0 billion compared with $2.2 billion during the comparable prior year period.

The decrease is primarily driven by higher inventory growth, net of accounts payable in the current 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.

The decrease was partially offset by growth in net income due to accelerated sales growth.

Our net cash flows used in investing activities for the thirty-six weeks ended May 7, 2022 were $360.7 million as compared with $358.7 million in the comparable prior year period.

Capital expenditures for the thirty-six weeks ended May 7, 2022 were $369.4 million compared to $375.7 million in the comparable prior year period.

Investing cash flows were impacted by our wholly owned captive, which purchased $46.5 million and sold $37.9 million in marketable debt securities during the thirty-six weeks ended May 7, 2022.

For the twelve weeks ended November 19, 2022, our net cash flows from operating activities provided $793.6 million compared with $777.9 million during the comparable prior year period.

The increase is primarily driven by reduced inventory growth, net of accounts payable in the current year.

Our net cash flows used in investing activities for the twelve weeks ended November 19, 2022 were $113.9 million as compared with $91.0 million in the comparable prior year period.

Capital expenditures for the twelve weeks ended November 19, 2022 were $114.4 million compared to $102.3 million in the comparable prior year period.

Investing cash flows were impacted by our wholly owned captive, which purchased $12.0 million and sold $4.9 million in marketable debt securities during the twelve weeks ended November 19, 2022.

During the comparable prior year period, the captive purchased $7.0 million in marketable debt securities and sold $3.7 million.

Our net cash flows used in financing activities for the thirty-six weeks ended May 7, 2022 were $2.5 billion compared to $2.7 billion in the comparable prior year period.

Stock repurchases were $3.4 billion in the current thirty-six week period as compared with $2.5 billion in the prior year period.

Our net cash flows used in financing activities for the twelve weeks ended November 19, 2022 were $675.6 million compared to $895.9 million in the comparable prior year period.

Stock repurchases were $900.0 million in the current

twelve week period and in the prior year period.

The treasury stock repurchases were primarily funded by cash flows from operations.

D uring the thirty-six weeks ended May 7, 2022 , we repaid our $500 million 3.700% Senior Notes due April 2022, which were callable at par in January 2022.

In the comparable prior year period, we repaid the $250 million 2.500% Senior Notes due April 2021, which were callable at par in March 2021.

For the thirty-six week period ended May 7, 2022, our commercial paper activity resulted in $1.3 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 for the thirty-six weeks ended May 7, 2022 and May 8, 2021 provided $98.1 million and $121.9 million, respectively.

For the twelve week period ended November 19, 2022, our commercial paper activity resulted in $204.9 million 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 for the twelve weeks ended November 19, 2022 and November 20, 2021 provided $40.8 million and $21.1 million, respectively.

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 international businesses, which includes new stores, including hubs and mega hubs, as well as new distribution centers and expansions of existing distribution centers.

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 initial investment) and whether such buildings are located in the U.S., Mexico or Brazil, or located in urban or rural areas.

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

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

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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 127.9% at May 7, 2022, compared to 123.9% at May 8, 2021.

The increase from the comparable prior year period was primarily due to increased purchases with favorable vendor terms and higher inventory turns.

Accounts payable, as a percentage of gross inventory, was 131.0% at November 19, 2022, compared to 129.4% at November 20, 2021.

The increase from the comparable prior year period was primarily due to recent price inflation.

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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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 May 7, 2022, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 51.4% as compared to 40.2% for the comparable prior year period.

For the trailing four quarters ended November 19, 2022, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 54.3% as compared to 44.7% for the comparable prior year period.

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

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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.

On November 15, 2021, we amended and restated our existing revolving credit facility (as amended from time to time, 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.

On November 15, 2022, the Company amended the Revolving Credit Agreement, extending the termination date by one year.

As amended, the Revolving Credit Agreement will terminate, and all amounts borrowed will be due and payable, on November 15, 2027, but we may make one additional request to extend the termination date for an additional period of one year.

Revolving borrowings under the Revolving Credit Agreement may be base rate loans, Term SOFR 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 May 7, 2022, we had no outstanding borrowings and $1.8 million of outstanding letters of credit under our Revolving Credit Agreement.

As of November 19, 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 May 7, 2022, we had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires 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.

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 May 7, 2022.

As of November 19, 2022, we had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires in June 2025.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had $107.2 million in letters of credit outstanding as of November 19, 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 May 7, 2022, our $1.3 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 May 7, 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.

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 May 7, 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 2.1:1 as of May 7, 2022 and was 2.0:1 as of May 8, 2021.

As of November 19, 2022, the 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 Agreement.

As of November 19, 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.

The Senior Notes contain a provision that repayment may be accelerated if we experience a change in control (as defined in the agreements).

The Company’s borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens.

All of the repayment obligations under its 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 November 19, 2022, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

As of November 19, 2022, the Company was in compliance with all covenants and expects to remain in compliance with all covenants under its borrowing arrangements

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio was 2.2:1 as of November 19, 2022 and was 2.0:1 as of November 20, 2021.

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

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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.

We expect 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;

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Stock Repurchases

From January 1, 1998 to May 7, 2022, we have repurchased a total of 152.0 million shares of our common stock at an aggregate cost of $29.1 billion, including 1.7 million shares of our common stock at an aggregate cost of $3.4 billion during the thirty-six week period ended May 7, 2022.

On March 22, 2022, the Board voted to authorize the repurchase of an additional $2.0 billion of our common stock in connection with our ongoing share repurchase program, which raised the total value of shares authorized to be repurchased to $31.2 billion.

Considering the cumulative repurchases as of May 7, 2022, we had $2.1 billion remaining under the Board’s authorization to repurchase our common stock.

Subsequent to May 7, 2022 and through June 3, 2022, we have repurchased 103,726 shares of our common stock at an aggregate cost of $203.6 million.

From January 1, 1998 to November 19, 2022, we have repurchased a total of 152.9 million shares of our common stock at an aggregate cost of $31.0 billion, including 392.2 thousand shares of our common stock at an aggregate cost of $900.0 million during the twelve week period ended November 19, 2022.

On October 4, 2022, the Board voted to authorize the repurchase of an additional $2.5 billion of our common stock in connection with our ongoing share repurchase program, which raised the total value of shares authorized to be repurchased to $33.7 billion.

Considering the cumulative repurchases as of November 19, 2022, we had $2.7 billion remaining under the Board’s authorization to repurchase our common stock.

Subsequent to November 19, 2022 and through December 9, 2022, we have repurchased 42.9 thousand shares of our common stock at an aggregate cost of $108.0 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 May 7, 2022, was $131.9 million, compared with $162.4 million at August 28, 2021, and our total surety bonds commitment at May 7, 2022, was $37.6 million, compared with $35.4 million at August 28, 2021.

Our total stand-by letters of credit commitment at November 19, 2022, was $133.9 million, compared with $130.5 million at August 27, 2022, and our total surety bonds commitment at November 19, 2022, was $47.0 million, compared with $46.0 million at August 27, 2022.

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 May 7, 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.

Except for the previously discussed Revolving Credit Agreement, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 27, 2022.

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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain financial measures not derived in accordance with GAAP, including Adjusted operating profit, Adjusted net income, Adjusted diluted earnings per share, Adjusted After-Tax ROIC and Adjusted Debt to EBITDAR.

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.

However, we have presented non-GAAP financial measures, as we believe they provide additional information that is useful to investors.

Additionally, our management uses these non-GAAP financial measures to review and assess our underlying operating results and the Compensation Committee of the Board uses select measures to determine payments of performance-based compensation against pre-established targets.

Adjusted operating profit, Adjusted net income and Adjusted diluted earnings per share present our financial results excluding the non-cash LIFO charge, which vary from period to period, and assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry.

Adjusted After-Tax ROIC and Adjusted Debt to EBITDAR 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.

We have included reconciliations of this information to the most comparable GAAP measures in the following reconciliation tables.

Reconciliation of Non-GAAP Financial Measure:

Adjusted operating profit, Adjusted net income and Adjusted diluted earnings per share

The following tables reconcile operating profit, net income, and diluted EPS to adjusted operating profit, adjusted net income and adjusted diluted earnings per share, which are presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the twelve weeks ended November 19, 2022 and November 20, 2021.

Twelve Weeks Ended

(in thousands, except per share data)

Operating profit (GAAP)

Cost of sales adjustment:

Non-cash LIFO charge

Adjusted operating profit (Non-GAAP)

Net income (GAAP)

Cost of sales adjustment:

Non-cash LIFO charge

Provision for income taxes on adjustment (1)

Adjusted net income (Non-GAAP)

Diluted earnings per share (GAAP)

Non-cash LIFO charge, net of tax

Adjusted diluted earnings per share (Non-GAAP)

(1) The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustment.

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 May 7, 2022 and May 8, 2021.

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended November 19, 2022 and November 20, 2021.

Trailing Four

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Adjusted Debt to EBITDAR

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended May 7, 2022 and May 8, 2021.

Trailing Four

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Adjusted debt to EBITDAR

(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 May 7, 2022 and May 8, 2021 .

Trailing Four Quarters Ended

(in thousands)

November 19, 2022

November 20, 2021

Total lease cost, per ASC 842

1 unchanged sentence

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

(2) Effective tax rate over trailing four quarters ended May 7, 2022 and May 8, 2021 is 20.5% and 21.8%, respectively.

(2) Effective tax rate over trailing four quarters ended November 19, 2022 and November 20, 2021 is 20.4% and 21.0%, respectively.

(3) All averages are computed based on trailing five quarter balances.

5 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis