What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-18 compared with 2023-06-09 · 85 added, 134 removed, 173 unchanged (56% of the section changed)

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credit market conditions;

access to available and feasible financing;

access to available and feasible financing on favorable terms;

future stock repurchases;

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inflation, including wage inflation;

the ability to hire, train and retain qualified employees;

the ability to hire, train and retain qualified employees including members of management and other key personnel;

construction delays;

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and other 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 Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarterly period ended November 19, 2022.

T hese Risk Factors should be read carefully.

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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 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 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.

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

Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com.

We began operations in 1979 and at November 18, 2023, operated 6,316 stores in the U.S., 745 stores in Mexico and 104 stores in Brazil.

Each store carries an extensive product line for cars, sport utility vehicles, vans and light duty trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

At November 18, 2023, in 5,803 of our domestic stores as well as the vast majority of our stores in Mexico and Brazil, we had a commercial sales program that provided commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations, fleet owners and other accounts.

We also sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com.

Additionally, we sell the ALLDATA brand of automotive diagnostic, repair, collision and shop management software through www.alldata.com.

We also provide product information on our Duralast branded products through www.duralastparts.com.

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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 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.

Operating results for the twelve weeks ended November 18, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2024.

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

The fourth quarters of fiscal 2023 and 2022 each have 16 weeks.

The fourth quarter of fiscal 2024 has 17 weeks and the fourth quarter of fiscal 2023 has 16 weeks.

Our business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September, and the lowest sales generally occurring in the months of December and January.

Executive Summary

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.

Operating profit increased 9.3% to $858.5 million compared to $785.7 million in the prior year period.

Net income for the quarter increased 9.3% to $647.7 million compared to $592.6 million in the prior year period.

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 $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, freight and transportation costs, 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 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.

Net sales increased to $4.2 billion, a 5.1% increase over the prior year period.

Our retail and commercial sales in our domestic and international markets grew as we continue to make progress on our growth initiatives.

Operating profit increased 17.4% to $848.6 million, net income increased 10.0% to $593.5 million and diluted earnings per share increased 18.6% to $32.55.

During the first quarter of fiscal 2024, 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.

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

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.

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 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.

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

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 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.

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

increased 0.9% compared to the same period in the prior year.

Twelve Weeks Ended November 18, 2023

Compared with Twelve Weeks Ended November 19, 2022

Net sales for the twelve weeks ended November 18, 2023 increased $205.2 million to $4.2 billion, or 5.1% over net sales of $4.0 billion for the comparable prior year period.

This growth was driven primarily by an increase in total company same store sales of 2.1% on a constant currency basis and net sales of $75.7 million from new domestic and international stores.

Domestic commercial sales increased $58.6 million to $1.1 billion, or 5.7% over 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.

Same store sales, or sales for our domestic and international stores open at least one year, are as follows:

Twelve Weeks Ended

Constant Currency (1)

International

Total Company

(1) Constant currency same store sales exclude impacts from fluctuations of foreign exchange rates by converting both the current year and prior year international results at the prior year foreign currency exchange rate.

Gross profit for the twelve weeks ended November 18, 2023 was $2.2 billion, compared with $2.0 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 52.8% compared to 50.1% 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.

The increase in gross margin was driven by 208 basis point ($83.0 million net) non-cash LIFO favorability, with the remaining increase primarily from favorable supply chain costs and higher merchandise margins.

Operating, selling, general and administrative expenses for the twelve weeks ended November 18, 2023 were $1.4 billion compared with $1.3 billion during the comparable prior year period.

As a percentage of sales, these expenses were 32.6% compared with 31.9% during the comparable prior year period.

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.

The increase was driven primarily by domestic store payroll and investment in technology related initiatives.

Net interest expense was $91.4 million and $57.7 million for the twelve weeks ended November 18, 2023 and November 19, 2022, respectively.

Average borrowings were $8.1 billion and $6.2 billion, and weighted average borrowing rates were 4.23% and 3.47% for the twelve weeks ended November 18, 2023 and November 19, 2022, respectively.

Our effective income tax rate was 21.6% and 18.9% of pretax income for the twelve weeks ended November 18, 2023, and November 19, 2022, respectively.

The benefit from stock options exercised for the twelve week period ended November 18, 2023 was $11.2 million compared to $29.7 million in the comparable prior year period.

Net income for the twelve weeks ended November 18, 2023 increased by $54.1 million from the comparable prior year period to $593.5 million due to the factors set forth above, and diluted earnings per share increased by 18.6% to $32.55 from $27.45.

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 $0.41.

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 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.

As of November 18, 2023, we held $283.0 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.

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 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.

For the twelve week periods ended November 18, 2023 and November 19, 2022, our net cash flows from operating activities provided $830.3 million and $793.6 million, respectively.

Our net cash flows used in investing activities for the twelve weeks ended November 18, 2023 were $270.5 million as compared with $113.9 million in the comparable prior year period.

Capital expenditures for the twelve weeks ended November 18, 2023 were $235.4 million compared to $114.4 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 twelve weeks ended November 18, 2023 and November 19, 2022, we opened 25 and 35 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $4.1 million and sold $1.9 million in marketable debt securities during the twelve weeks ended November 18, 2023.

During the comparable prior year period, the captive purchased $12.0 million and sold $4.9 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 $2.7 billion in the current thirty-six week period as compared with $3.4 billion in the comparable prior year period.

Our investment in tax credit equity investments was $41.2 million during the twelve weeks ended November 18, 2023 compared to $2.5 million during the comparable prior year period.

Our net cash flows used in financing activities for the twelve weeks ended November 18, 2023 were $552.2 million compared to $675.6 million in the comparable prior year period.

During the twelve weeks ended November 18, 2023, we received $1.0 billion in debt issuances and no debt was issued in the comparable prior year period .

Stock repurchases were $1.5 billion in the current twelve week period as compared with $900.0 million in the comparable prior year period.

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

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.

For the twelve week period ended November 18, 2023, we had $76.9 million in net repayments of commercial paper compared to $204.9 million 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 twelve weeks ended November 18, 2023 and November 19, 2022 provided $41.4 million and $40.8 million, respectively.

During fiscal 2024, we expect to increase the investment in our business as compared to fiscal 2023.

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.

Our investments are expected to be directed primarily to our supply chain initiatives, which include 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.

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We plan to continue leveraging our inventory purchases;

however, our ability to do so may be limited by our vendors’ capacity to factor their receivables from us.

Certain vendors participate in arrangements with financial institutions whereby they factor their AutoZone receivables, allowing

them to receive early payment from the financial institution on our invoices at a discounted rate.

The terms of these agreements are between the vendor and the financial institution.

Upon request from the vendor, we confirm to the vendor’s financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances.

A downgrade in our credit or changes in the financial markets may limit the financial institutions’ willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms.

A reduction in payment terms would increase the working capital required to fund future inventory investments.

Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio.

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

however, our ability to do so may be limited by our supplier’s capacity to factor their receivables from us.

The Company has arrangements with third-party financial institutions to confirm invoice balances owed by the Company to certain suppliers and pay the financial institutions the confirmed amounts on the invoice due dates.

These arrangements allow the Company’s inventory suppliers, at their sole discretion, to enter into agreements with these financial institutions to finance the Company’s obligations to the suppliers at terms negotiated between the suppliers and the financial institutions.

Supplier participation is optional and our obligations to our suppliers, including the amount and dates due, are not impacted by our suppliers’ decision to enter into an agreement with a third-party financial institution.

A downgrade in our credit or changes in the financial markets could limit the financial institutions’ willingness to participate in these arrangements;

however, we do not believe such risk would have a material impact on our working capital or cash flows.

We plan to continue negotiating extended terms with our suppliers, reducing our working capital required and resulting in a high accounts payable to inventory ratio.

We had an accounts payable to inventory ratio of 124.4% at November 18, 2023 and 131.0% at November 19, 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 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.

For the trailing four quarters ended November 18, 2023, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 55.0% as compared to 54.3% 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 May 6, 2023, we had no outstanding borrowings and $1.8 million of outstanding letters of credit under our Revolving Credit Agreement.

As of November 18, 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 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.

As of November 18, 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 $120.5 million in letters of credit outstanding as of November 18, 2023.

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

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 governing the Senior Notes) and a rating event (as defined in the agreements governing the Senior Notes).

As of November 18, 2023, the $1.1 billion commercial paper borrowings 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 November 18, 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 October 25, 2023, we issued $500 million in 6.250% Senior Notes due November 2028 and $500 million in 6.550% Senior Notes due November 2033.

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

The Senior Notes contain a provision that repayment may be accelerated if we experience a change of control (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 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.

As of November 18, 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 2.5:1 as of November 18, 2023 and was 2.2:1 as of November 19, 2022.

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.

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 EBITDAR increases, we expect our debt levels to increase;

To the extent EBITDAR increases, we expect our debt levels to increase;

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

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Stock Repurchases

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.

From January 1, 1998 to November 18, 2023, we have repurchased a total of 154.6 million shares of our common stock at an aggregate cost of $35.3 billion, including 579.7 thousand shares of our common stock at an aggregate cost of $1.5 billion (inclusive of excise tax of $14.4 million) during the twelve week period ended November 18, 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 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.

On June 14, 2023, 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 $35.7 billion.

Considering the cumulative repurchases as of November 18, 2023, we had $333.1 million remaining under the Board’s authorization to repurchase our common stock.

Subsequent to November 18, 2023 and through December 11, 2023, we have repurchased 40.1 thousand shares of our common stock at an aggregate cost of $106.0 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 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.

Our total stand-by letters of credit commitment at November 18, 2023, was $147.2 million, compared with $134.0 million at August 26, 2023, and our total surety bonds commitment at November 18, 2023, was $43.4 million, compared with $43.1 million at August 26, 2023.

Financial Commitments

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.

Except for the previously discussed Revolving Credit Agreement, the $500 million 6.250% Senior Notes due November 2028 and $500 million 6.550% Senior Notes due November 2033 debt issuances, and the $76.9 million net decrease 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 26, 2023.

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, 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.

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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 (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.

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

Reconciliation of Non-GAAP Financial Measures:

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 thirty-six week periods ended May 6, 2023 and May 7, 2022.

Twelve Weeks Ended

Thirty-Six Weeks Ended

(in thousands, except per share data)

Operating profit (GAAP)

Cost of sales adjustment:

Non-cash LIFO (benefit) charge

Adjusted operating profit (Non-GAAP)

Net income (GAAP)

Cost of sales adjustment:

Non-cash LIFO (benefit) charge

Provision for income taxes on adjustment (1)

Adjusted net income (Non-GAAP)

Weighted average shares for basic earnings per share

Effect of dilutive stock equivalents

Weighted average shares for diluted earnings per share

Diluted earnings per share (GAAP)

Non-cash LIFO (benefit) 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 6, 2023 and May 7, 2022.

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended November 18, 2023 and November 19, 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 May 6, 2023 and May 7, 2022.

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended November 18, 2023 and November 19, 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 May 6, 2023 and May 7, 2022 .

Trailing Four Quarters Ended

(in thousands)

November 18, 2023

November 19, 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 May 6, 2023 and May 7, 2022 was 20.0% and 20.5%, respectively.

(2) Effective tax rate over trailing four quarters ended November 18, 2023 and November 19, 2022 was 20.8% and 20.4%, 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