What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-06-09 compared with 2023-03-17 · 96 added, 98 removed, 211 unchanged (48% of the section changed)

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damage to our reputation;

challenges associated with international markets;

challenges associated with doing business in and expanding into international markets;

origin and raw material costs of suppliers;

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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 February 11, 2023, operated 6,226 stores in the U.S., 707 stores in Mexico and 81 stores in Brazil.

We began operations in 1979 and at May 6, 2023, operated 6,248 stores in the U.S., 713 stores in Mexico and 83 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 11, 2023, in 5,500 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.

At May 6, 2023, in 5,526 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.

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

Operating results for the twelve and twenty-four weeks ended February 11, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending August 26, 2023.

Operating results for the twelve and thirty-six weeks ended May 6, 2023 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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Executive Summary

Net sales increased 9.5% for the quarter ended February 11, 2023 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 5.3%.

Net sales increased 5.8% for the quarter ended May 6, 2023 compared to the prior year period, which was driven by net sales from new stores and an increase in domestic same store sales (sales from stores open at least one year) of 1.9%.

Domestic commercial sales increased 6.3%, which represents approximately 30.7% of our domestic auto parts sales.

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Diluted earnings per share increased 17.5% to $34.12 per share from $29.03 per share in the prior year period.

The above results include a $10.0 million non-cash LIFO charge incurred for the quarter ended February 11, 2023.

Adjusting for the non-cash LIFO charge, adjusted operating profit increased 8.5%, adjusted net income increased 2.6% and adjusted diluted earnings per share increased 12.3% compared to the prior year period.

The above results include a $17.0 million non-cash LIFO benefit for the quarter ended May 6, 2023.

Adjusting for the non-cash LIFO benefit, adjusted operating profit for the quarter increased 7.1%, adjusted net income increased 7.1% and adjusted diluted earnings per share increased 15.2% compared to the prior year period.

Management believes these non-GAAP financial measures are useful in providing period-to-period 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 .

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.

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 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.

During the third quarter of fiscal 2023, failure and maintenance related categories represented the largest portion of our sales mix at approximately 85% 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.

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The average age of 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.

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 S&P Global Mobility.

As of January 1, 2023, the average age of light vehicles on the road was 12.5 years.

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

were down 2.6% compared to the same period in the prior year.

Twelve Weeks Ended February 11, 2023

Compared with Twelve Weeks Ended February 12, 2022

Net sales for the twelve weeks ended February 11, 2023 increased $321.2 million to $3.7 billion, or 9.5% over net sales of $3.4 billion for the comparable prior year period.

Total auto parts sales increased by 9.6%, primarily driven by an increase in domestic same store sales of 5.3% and net sales of $75.5 million from new stores.

Domestic commercial sales increased $110.7 million to $954.6 million, or 13.1%, over the comparable prior year period.

Gross profit for the twelve weeks ended February 11, 2023 was $1.9 billion, compared with $1.8 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 52.3% compared to 53.0% during the comparable prior year period.

The decrease in gross margin was impacted by a 27 basis point ($10.0 million) non-cash LIFO charge driven primarily by rising freight costs, with the remaining decrease resulting primarily from supply chain costs and accelerated growth in our commercial business.

Operating, selling, general and administrative expenses for the twelve weeks ended February 11, 2023 were $1.3 billion compared with $1.2 billion during the comparable prior year period.

Since the beginning of the fiscal year and through March 2023 (latest publicly available information), miles driven in the U.S.

were up 0.8% compared to the same period in the prior year.

Twelve Weeks Ended May 6, 2023

Compared with Twelve Weeks Ended May 7, 2022

Net sales for the twelve weeks ended May 6, 2023 increased $225.3 million to $4.1 billion, or 5.8% over net sales of $3.9 billion for the comparable prior year period.

Total auto parts sales increased by 5.8%, primarily driven by net sales of $71.8 million from new stores and an increase in domestic same store sales of 1.9%.

Domestic commercial sales increased $66.2 million to $1.1 billion, or 6.3%, over the comparable prior year period.

Gross profit for the twelve weeks ended May 6, 2023 was $2.1 billion, compared with $2.0 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 52.5% compared to 51.9% during the

comparable prior year period.

The increase in gross margin was impacted by a 42 basis point ($17.0 million) non-cash LIFO benefit, with the remaining increase primarily from higher merchandise margins.

Operating, selling, general and administrative expenses for the twelve weeks ended May 6, 2023 were $1.3 billion compared with $1.2 billion during the comparable prior year period.

As a percentage of sales, these expenses were 31.5% compared with 31.6% during the comparable prior year period.

Net interest expense for the twelve weeks ended February 11, 2023, was $65.6 million compared with $42.5 million during the comparable prior year period.

Average borrowings for the twelve weeks ended February 11, 2023 were $6.9 billion, compared with $5.6 billion for the comparable prior year period.

Weighted average borrowing rates were 3.70% and 3.03% for the quarters ended February 11, 2023 and February 12, 2022, respectively.

Our effective income tax rate was 21.2% of pretax income for the twelve weeks ended February 11, 2023, and 19.3% for the comparable prior year period.

The increase in the tax rate was primarily attributable to a decreased benefit from stock options exercised during the twelve weeks ended February 11, 2023.

The benefit of stock options exercised for the twelve week period ended February 11, 2023 was $13.4 million compared to $23.4 million in the comparable prior year period.

Net income for the twelve weeks ended February 11, 2023 increased by $4.8 million to $476.5 million due to the factors set forth above, and diluted earnings per share increased by 10.5% to $24.64 from $22.30.

Excluding the non-cash LIFO charge, adjusted net income increased 2.6% to $484.2 million, and adjusted diluted earnings per share increased 12.3% to $25.04.

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 $0.42.

Twenty-Four Weeks Ended February 11, 2023

Compared with Twenty-Four Weeks Ended February 12, 2022

Net sales for the twenty-four weeks ended February 11, 2023 increased $637.4 million to $7.7 billion, or 9.1% over net sales of $7.0 billion for the comparable prior year period.

Net interest expense for the twelve weeks ended May 6, 2023, was $74.3 million compared with $41.9 million during the comparable prior year period.

Average borrowings for the twelve weeks ended May 6, 2023 were $7.2 billion, compared with $6.0 billion for the comparable prior year period.

Weighted average borrowing rates were 3.85% and 2.74% for the twelve weeks ended May 6, 2023 and May 7, 2022, respectively.

Our effective income tax rate was 17.4% of pretax income for the twelve weeks ended May 6, 2023, and 20.3% 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 6, 2023.

The benefit of stock options exercised for the twelve week period ended May 6, 2023 was $46.7 million compared to $21.1 million in the comparable prior year period.

Net income for the twelve weeks ended May 6, 2023 increased by $55.2 million from the comparable prior year period to $647.7 million due to the factors set forth above, and diluted earnings per share increased by 17.5% to $34.12 from $29.03.

Excluding the non-cash LIFO benefit, adjusted net income increased 7.1% to $634.7 million, and adjusted diluted earnings per share increased 15.2% to $33.43.

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 $0.78 per share.

Thirty-Six Weeks Ended May 6, 2023

Compared with Thirty-Six Weeks Ended May 7, 2022

Net sales for the thirty-six weeks ended May 6, 2023 increased $862.7 million to $11.8 billion, or 7.9% over net sales of $10.9 billion for the comparable prior year period.

Total auto parts sales increased by 7.9%, primarily driven by an increase in domestic same store sales of 4.2% and net sales of $207.1 million from new stores.

Domestic commercial sales increased $311.3 million to $3.1 billion, or 11.2%, over the comparable prior year period.

Gross profit for the twenty-four weeks ended February 11, 2023 was $3.9 billion, compared with $3.7 billion during the comparable prior year period.

Gross profit for the thirty-six weeks ended May 6, 2023 was $6.1 billion, compared with $5.7 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 51.6% compared to 52.4% during the comparable prior year period.

The decrease in gross margin was driven by a 119 basis point ($91.0 million) non-cash LIFO charge driven primarily by rising freight costs, with the remaining decrease resulting primarily from supply chain costs and accelerated growth in our commercial business.

Operating, selling, general and administrative expenses for the twenty-four weeks ended February 11, 2023, were $2.5 billion compared with $2.3 billion during the comparable prior year period.

The decrease in gross margin was driven by a 63 basis point ($74.0 million) non-cash LIFO net charge driven primarily by freight costs.

Operating, selling, general and administrative expenses for the thirty-six weeks ended May 6, 2023, were $3.8 billion compared with $3.5 billion during the comparable prior year period.

As a percentage of sales, these expenses were 32.5% compared with 32.6% during the comparable prior year period.

Net interest expense for the twenty-four weeks ended February 11, 2023, was $123.3 million compared with $85.8 million during the comparable prior year period.

Average borrowings for the twenty-four weeks ended February 11, 2023 were $6.5 billion, compared with $5.4 billion for the comparable prior year period.

Weighted average borrowing rates were 3.58% and 3.17% for the twenty-four week periods ended February 11, 2023 and February 12, 2022, respectively.

Our effective income tax rate was 20.0% of pretax income for the twenty-four weeks ended February 11, 2023, and 20.7% 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 11, 2023.

The benefit of stock

options exercised for the twenty-four weeks period ended February 11, 2023 was $43.1 million compared to $34.7 million in the comparable prior year period.

Net income for the twenty-four weeks ended February 11, 2023 decreased by $11.1 million to $1.0 billion due to the factors set forth above, and diluted earnings per share increased by 8.5% to $52.12 from $48.03.

Excluding the non-cash LIFO charge, adjusted net income increased 5.7% to $1.1 billion, and adjusted diluted earnings per share increased 16.0% to $55.70.

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 $1.12.

Net interest expense for the thirty-six weeks ended May 6, 2023, was $197.6 million compared with $127.6 million during the comparable prior year period.

Average borrowings for the thirty-six weeks ended May 6, 2023 were $6.8 billion, compared with $5.6 billion for the comparable prior year period.

Weighted average borrowing rates were 3.67% and 3.03% for the thirty-six week periods ended May 6, 2023 and May 7, 2022, respectively.

Our effective income tax rate was 19.0% of pretax income for the thirty-six weeks ended May 6, 2023, 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 thirty-six weeks ended May 6, 2023.

The benefit of stock options exercised for the thirty-six week period ended May 6, 2023 was $89.8 million compared to $55.9 million in the comparable prior year period.

Net income for the thirty-six weeks ended May 6, 2023 increased by $44.0 million from the comparable prior year period to $1.7 billion due to the factors set forth above, and diluted earnings per share increased by 12.0% to $86.10 from $76.90.

Excluding the non-cash LIFO net charge, adjusted net income increased 6.2% to $1.7 billion, and adjusted

diluted earnings per share increased 15.8% to $89.04.

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 $1.28 per share.

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 quarter’s 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 11, 2023, we held $301.3 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 May 6, 2023, we held $274.9 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 each of the twenty-four week periods ended February 11, 2023 and February 12, 2022, our net cash flows from operating activities provided $1.1 billion.

Our net cash flows used in investing activities for the twenty-four weeks ended February 11, 2023 were $270.0 million as compared with $211.3 million in the comparable prior year period.

Capital expenditures for the twenty-four weeks ended February 11, 2023 were $259.2 million compared to $208.1 million in the comparable prior year period.

The increase in capital expenditures was primarily driven by our growth initiatives, including hub and mega hub expansion projects, new distribution centers and new stores.

During the twenty-four week period ended February 11, 2023 and February 12, 2022, we opened 71 and 48 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $14.0 million and sold $3.5 million in marketable debt securities during the twenty-four weeks ended February 11, 2023.

During the comparable prior year period, the captive purchased $22.6 million in marketable debt securities and sold $13.9 million.

Our net cash flows used in financing activities for the twenty-four weeks ended February 11, 2023 were $844.7 million compared to $1.9 billion in the comparable prior year period.

During the twenty-four weeks ended February 11, 2023, we received $1.0 billion in debt issuances and repaid our $300 million 2.875% senior notes due January 2023.

For the thirty-six week periods ended May 6, 2023 and May 7, 2022, our net cash flows from operating activities provided $1.9 billion and $2.0 billion, respectively.

Our net cash flows used in investing activities for the thirty-six weeks ended May 6, 2023 were $479.0 million as compared with $360.7 million in the comparable prior year period.

Capital expenditures for the thirty-six weeks ended May 6, 2023 were $430.4 million compared to $369.4 million in the comparable prior year period.

The increase in capital expenditures was primarily driven by our growth initiatives, including new stores, hub and mega hub expansion projects and new distribution centers.

During the thirty-six week periods ended May 6, 2023 and May 7, 2022, we opened 101 and 79 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $48.4 million and sold $37.5 million in marketable debt securities during the thirty-six weeks ended May 6, 2023.

During the comparable prior year period, the captive purchased $46.5 million and sold $37.9 million in marketable debt securities.

Our net cash flows used in financing activities for the thirty-six weeks ended May 6, 2023 were $1.4 billion compared to $2.5 billion in the comparable prior year period.

During the thirty-six weeks ended May 6, 2023, we received $1.0 billion in debt issuances and repaid our $300 million 2.875% senior notes due January 2023.

During the comparable prior year period, no debt was issued and we repaid our $500 million 3.700% Senior Notes due April 2022.

Stock repurchases were $1.8 billion in the current twenty-four week period as compared with $2.5 billion in the comparable prior year period.

Stock repurchases were $2.7 billion in the current thirty-six week period as compared with $3.4 billion in the comparable prior year period.

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

For the twenty-four week period ended February 11, 2023, our commercial paper activity resulted in $227.6 million in net proceeds from commercial paper compared to $1.1 billion commercial paper net proceeds in the comparable prior year period.

Proceeds from the sale of common stock and exercises of stock options for the twenty-four weeks ended February 11, 2023 and February 12, 2022 provided $72.8 million and $66.5 million, respectively.

For the thirty-six week period ended May 6, 2023, we had $524.0 million in net proceeds from commercial paper compared to $1.3 billion in net proceeds from commercial paper in the comparable prior year period.

Proceeds from the sale of common stock and exercises of stock options for the thirty-six weeks ended May 6, 2023 and May 7, 2022 provided $154.9 million and $98.1 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 our supply chain initiatives, which includes expanded hub and mega hubs, as well as new distribution centers 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.

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

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.

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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 127.7% at February 11, 2023, compared to 126.8% at February 12, 2022.

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

Accounts payable, as a percentage of gross inventory, was 126.5% at May 6, 2023, compared to 127.9% at May 7, 2022.

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 February 11, 2023, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 54.7% as compared to 49.4% for the comparable prior year period.

For the trailing four quarters ended May 6, 2023, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 55.2% as compared to 51.4% 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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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 11, 2023, we had no outstanding borrowings and $1.8 million of outstanding letters of credit under our Revolving Credit Agreement.

As of May 6, 2023, 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 11, 2023, 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 February 11, 2023.

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 6, 2023, 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 May 6, 2023.

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

As of February 11, 2023, the $831.0 million commercial paper borrowings 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 February 11, 2023, 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 17, 2023, we repaid the $300 million 2.875% Senior Notes due January 2023.

As of May 6, 2023, the $1.1 billion commercial paper borrowings, the $500 million 3.125% Senior Notes due July 2023 and the $300 million 3.125% Senior Notes due April 2024 were classified as long-term in the accompanying Consolidated Balance Sheets as we currently have the ability and intent to refinance them on a long-term basis through

available capacity under our Revolving Credit Agreement .

As of May 6, 2023, 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 17, 2023, we repaid the outstanding $300 million 2.875% Senior Notes due January 2023.

On January 27, 2023, we issued $450 million in 4.500% Senior Notes due February 2028 and $550 million in 4.750% Senior Notes due February 2033.

Proceeds from the debt issuance were used to repay a portion of the outstanding commercial paper borrowings and for other general corporate purposes.

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

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

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 February 11, 2023, 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 2.3:1 as of February 11, 2023 and was 2.0:1 as of February 12, 2022.

As of May 6, 2023, 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 2.3:1 as of May 6, 2023 and was 2.1:1 as of May 7, 2022.

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.

and we calculate 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.

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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;

conversely, if adjusted EBITDAR decreases, we would expect our debt levels to decrease.

Once the target ratio is achieved, to the extent EBITDAR increases, we expect our debt levels to increase;

conversely, if 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 11, 2023, we have repurchased a total of 153.3 million shares of our common stock at an aggregate cost of $31.9 billion, including 764.3 thousand shares of our common stock at an aggregate cost of $1.8 billion during the twenty-four week period ended February 11, 2023.

From January 1, 1998 to May 6, 2023, we have repurchased a total of 153.6 million shares of our common stock at an aggregate cost of $32.8 billion, including 1.1 million shares of our common stock at an aggregate cost of $2.7 billion (inclusive of excise tax of $14.0 million) during the thirty-six week period ended May 6, 2023.

The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 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 February 11, 2023, we had $1.8 billion remaining under the Board’s authorization to repurchase our common stock.

Subsequent to February 11, 2023 and through March 10, 2023, we have repurchased 83.5 thousand shares of our common stock at an aggregate cost of $210.0 million.

Considering the cumulative repurchases as of May 6, 2023, we had $843.6 million remaining under the Board’s authorization to repurchase our common stock.

Subsequent to May 6, 2023 and through June 2, 2023, we have repurchased 86.7 thousand shares of our common stock at an aggregate cost of $219.9 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 11, 2023, was $133.9 million, compared with $130.5 million at August 27, 2022, and our total surety bonds commitment at February 11, 2023, was $45.9 million, compared with $46.0 million at August 27, 2022.

Our total stand-by letters of credit commitment at May 6, 2023, was $134.0 million, compared with $130.5 million at August 27, 2022, and our total surety bonds commitment at May 6, 2023, was $47.3 million, compared with $46.0 million at August 27, 2022.

Financial Commitments

Except for the previously discussed Revolving Credit Agreement, the $550 million 4.750% Senior Notes due February 2023 and $450 million 4.500% Senior Notes due February 2028 debt issuances, and the $300 million 2.875% Senior Notes debt repayment, 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.

Except for the previously discussed Revolving Credit Agreement, the $550 million 4.750% Senior Notes due February 2033 and $450 million 4.500% Senior Notes due February 2028 debt issuances, the $300 million 2.875% Senior Notes debt repayment and the $524.0 net increase in commercial paper, 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

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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 charges, 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 operating profit, Adjusted net income and Adjusted diluted earnings per share present our financial results excluding the non-cash LIFO (benefit)/charge, which varies 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.

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

The following tables reconcile operating profit, net income, and diluted earnings per share 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 and twenty-four week periods ended February 11, 2023 and February 12, 2022.

The following tables reconcile operating profit, net income, and diluted earnings per share 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 and thirty-six week periods ended May 6, 2023 and May 7, 2022.

Twelve Weeks Ended

Twenty-Four Weeks Ended

Thirty-Six Weeks Ended

(in thousands, except per share data)

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Cost of sales adjustment:

Non-cash LIFO charge

Non-cash LIFO (benefit) charge

Adjusted operating profit (Non-GAAP)

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Cost of sales adjustment:

Non-cash LIFO charge

Non-cash LIFO (benefit) charge

Provision for income taxes on adjustment (1)

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Diluted earnings per share (GAAP)

Non-cash LIFO charge, net of tax

Non-cash LIFO (benefit) charge, net of tax

Adjusted diluted earnings per share (Non-GAAP)

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Adjusted After-Tax ROIC

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended February 11, 2023 and February 12, 2022.

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended May 6, 2023 and May 7, 2022.

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 February 11, 2023 and February 12, 2022.

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended May 6, 2023 and May 7, 2022.

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 February 11, 2023 and February 12, 2022 .

Trailing Four Quarters Ended

(in thousands)

February 11, 2023

February 12, 2022

Total lease cost, per ASC 842

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

(2) Effective tax rate over trailing four quarters ended February 11, 2023 and February 12, 2022 was 20.8%.

(2) Effective tax rate over trailing four quarters ended May 6, 2023 and May 7, 2022 was 20.0% and 20.5%, respectively.

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

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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