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Item 2. Management’s Discussion and Analysis

2024-12-20 compared with 2024-06-07 · 89 added, 129 removed, 150 unchanged (59% of the section changed)

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(“AutoZone” or the “Company”).

The following MD&A discussion should be read in conjunction with our Condensed Consolidated Financial Statements, related notes to those statements and other financial information, including forward-looking statements and risk factors, that appear elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended August 26, 2023 and other filings we make with the SEC.

Forward-Looking Statements

Certain statements herein constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “seek,” “may,” “could” and similar expressions.

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.

These are based on assumptions and assessments made by our management in light of experience, historical trends, current conditions, expected future developments and other factors that we believe appropriate.

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inflation, including wage inflation;

exchange rates;

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

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disruption in our supply chain;

tariffs and trade policies;

new accounting standards;

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and other business interruptions.

These and other risks and uncertainties could materially and adversely affect our business and are discussed in more detail in the “Risk Factors” section in Item 1A under Part 1 of our Annual Report on Form 10-K for the year ended August 26, 2023 .

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

These and other 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 31, 2024 .

Forward-looking statements are not guarantees of future performance and actual results may differ materially 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 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 4, 2024, operated 6,364 stores in the U.S., 763 stores in Mexico and 109 stores in Brazil.

We began operations in 1979, and at November 23, 2024, operated 6,455 stores in the U.S., 800 stores in Mexico and 132 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 May 4, 2024, in 5,843 of our domestic stores as well as the vast majority of our stores in Mexico and Brazil, we had a commercial sales program that provides prompt delivery of parts and other products and commercial credit to local, regional and national repair garages, dealers, service stations, fleet owners and other accounts.

Through our mobile applications and websites, including www.autozone.com, we also sell automotive hard parts, maintenance items, accessories and non-automotive products, and our commercial customers can make purchases through www.autozonepro.com.

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

At November 23, 2024, in 5,935 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 prompt delivery of parts and other products and commercial credit 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 4, 2024 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.

Operating results for the twelve weeks ended November 23, 2024, are not necessarily indicative of the results that may be expected for the fiscal year ending August 30, 2025.

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 quarter of fiscal 2025 has 16 weeks, and the fourth quarter of fiscal 2024 had 17 weeks.

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Executive Summary

Net sales for the twelve weeks ended May 4, 2024 increased to $4.2 billion, a 3.5% increase over the comparable prior year period.

Net sales increased to $4.3 billion, a 2.1% 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 4.9% to $900.2 million, net income increased 0.6% to $651.7 million and diluted earnings per share increased 7.5% to $36.69 for the quarter.

During the third quarter of fiscal 2024, 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.

Operating profit decreased 0.9% to $841.1 million.

Operating profit was negatively impacted $17.0 million due to unfavorable exchange rates.

Net income decreased 4.8% to $564.9 million and diluted earnings per share decreased 0.1% to $32.52.

During the first quarter of fiscal 2025, 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.

Our business is impacted by various factors within the economy that affect both consumers and our industry, including but not limited to inflation, fuel costs, prevailing wage rates, supply chain disruptions, hiring and other economic conditions.

Given the nature of these macroeconomic factors, which are generally outside of our control, 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.

Our business is impacted by various factors within the economy that affect both our consumers and our industry, including but not limited to inflation, interest rates, levels of consumer debt, fuel and energy costs, prevailing wage rates, foreign exchange rate fluctuations, supply chain disruptions, tariffs and trade policies, 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.

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.

While over the long-term we have seen a close correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven.

During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road.

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.

As of January 1, 2024, the average age of light vehicles on the road was 12.6 years.

Since the beginning of the fiscal year and through March 2024 (latest publicly available information from the U.S.

Department of Transportation), miles driven in the U.S.

were up 1.2% compared to the same period in the prior year.

Twelve Weeks Ended May 4, 2024

Compared with Twelve Weeks Ended May 6, 2023

Net sales for the twelve weeks ended May 4, 2024 increased $144.9 million to $4.2 billion, or 3.5% over net sales of $4.1 billion for the comparable prior year period.

This growth was primarily driven by net sales of $76.9 million from new domestic and international stores and an increase in total company same store sales of 0.9% on a constant currency basis.

Domestic commercial sales increased $36.6 million to $1.1 billion, or 3.3% over the comparable prior year.

Same store sales, or sales from 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 May 4, 2024 was $2.3 billion, compared with $2.1 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 53.5% compared to 52.5% during the comparable prior year period.

The increase in gross margin was driven by higher merchandise margins and a 15 basis point ($7.0 million net) non-cash LIFO favorability.

Operating, selling, general and administrative expenses for the twelve weeks ended May 4, 2024 were $1.4 billion compared with $1.3 billion during the comparable prior year period.

As a percentage of sales, these expenses were 32.2% compared with 31.5% during the comparable prior year period.

The increase was primarily driven by domestic store payroll.

Net interest expense was $104.4 million and $74.3 million for the twelve weeks ended May 4, 2024 and May 6, 2023, respectively.

Average borrowings were $8.8 billion and $7.2 billion and weighted average borrowing rates were 4.43% and 3.85% for the twelve weeks ended May 4, 2024 and May 6, 2023, respectively.

Our effective income tax rate was 18.1% and 17.4% of pretax income for the twelve weeks ended May 4, 2024 and May 6, 2023, respectively.

The benefit from stock options exercised for the twelve week period ended May 4, 2024 was $38.1 million compared to $46.7 million in the comparable prior year period.

Net income for the twelve weeks ended May 4, 2024 increased by $4.0 million from the comparable prior year period to $651.7 million due to the factors set forth above, and diluted earnings per share increased by 7.5% to $36.69 from $34.12.

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 $0.55 per share.

Thirty-six Weeks Ended May 4, 2024

Compared with Thirty-six Weeks Ended May 6, 2023

Net sales for the thirty-six weeks ended May 4, 2024 increased $518.3 million to $12.3 billion, or 4.4% over net sales of $11.8 billion for the comparable prior year period.

This growth was driven primarily by net sales of $220.4 million from new domestic and international stores and an increase in total company same store sales of 1.5% on a constant currency basis.

For the 12-month period ended in September 2024, miles driven in the U.S.

increased 1.1% compared to the same period in the prior year, based on the latest information available from the U.S.

Department of Transportation.

According to S&P Global Mobility, as of January 1, 2024, the average age of light vehicles on the road was 12.6 years.

Twelve Weeks Ended November 23, 2024

Compared with Twelve Weeks Ended November 18, 2023

Net sales for the twelve weeks ended November 23, 2024, increased $89.4 million to $4.3 billion, or 2.1% over net sales for the comparable prior year period.

This growth was driven primarily by an increase in total company same store sales of 1.8% on a constant currency basis and net sales of $71.9 million from new domestic and international stores.

Domestic commercial sales increased $35.3 million to $1.1 billion, or 3.2% over the comparable prior year period.

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

Thirty-Six Weeks Ended

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)

November 23, 2024

November 18, 2023

November 23, 2024

November 18, 2023

International

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Gross profit for the thirty-six weeks ended May 4, 2024 was $6.6 billion, compared with $6.1 billion during the comparable prior year period.

Gross profit for the twelve weeks ended November 23, 2024, was $2.3 billion, compared with $2.2 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 53.0% compared to 52.8% during the comparable prior year period.

The increase in gross margin was driven by a 95 basis point ($114.0 million net) non-cash LIFO favorability, with the remaining increase resulting primarily from higher merchandise margins and favorable supply chain costs.

Operating, selling, general and administrative expenses for the thirty-six weeks ended May 4, 2024, were $4.1 billion compared with $3.8 billion during the comparable prior year period.

The increase in gross margin was driven primarily by higher merchandise margins.

Operating, selling, general and administrative expenses for the twelve weeks ended November 23, 2024, and the comparable prior year period were $1.4 billion.

As a percentage of sales, these expenses were 33.3% compared with 32.6% during the comparable prior year period.

The increase was primarily driven by domestic store payroll.

Net interest expense was $298.4 million and $197.6 million for the thirty-six weeks ended May 4, 2024 and May 6, 2023, respectively.

Average borrowings were $8.5 billion and $6.8 billion and weighted average borrowing rates were 4.35% and 3.67% for the thirty-six week periods ended May 4, 2024 and May 6, 2023, respectively.

Our effective income tax rate was 19.8% and 19.0% of pretax income for the thirty-six weeks ended May 4, 2024 and May 6, 2023, respectively.

The benefit from stock options exercised for the thirty-six week period ended May 4, 2024 was $72.3 million compared to $89.8 million in the comparable prior year period.

Net income for the thirty-six weeks ended May 4, 2024 increased by $96.6 million from the comparable prior year period to $1.8 billion due to the factors set forth above, and diluted earnings per share increased by 14.0% to $98.11 from $86.10.

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 $0.80.

Net interest expense for the twelve weeks ended November 23, 2024, was $107.6 million compared to $91.4 million during the comparable prior year period.

Average borrowings were $8.9 billion and $8.1 billion, and weighted average borrowing rates were 4.43% and 4.23% for the twelve weeks ended November 23, 2024, and November 18, 2023, respectively.

Our effective income tax rate for the twelve weeks ended November 23, 2024, was 23.0% of pretax income compared to 21.6% for the comparable prior year period.

The benefit from stock options exercised for the twelve week period ended November 23, 2024, was $5.3 million compared to $11.2 million in the comparable prior year period.

Net income for the twelve weeks ended November 23, 2024, decreased by $28.5 million from the comparable prior year period to $564.9 million due to the factors set forth above, and diluted earnings per share decreased by 0.1% to $32.52 from $32.55.

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 $0.22.

Liquidity and Capital Resources

The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories.

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 4, 2024, we held $275.4 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 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 growth initiatives and return excess cash to shareholders in the form of share repurchases.

As of November 23, 2024, we held $304.0 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 each of the thirty-six week periods ended May 4, 2024 and May 6, 2023, our net cash flows from operating activities provided $1.9 billion.

Cash flows from operations are slightly favorable to last year primarily due to higher net income.

Our net cash flows used in investing activities for the thirty-six weeks ended May 4, 2024 were $916.3 million as compared with $479.0 million in the comparable prior year period.

Capital expenditures for the thirty-six weeks ended May 4, 2024 were $725.9 million compared to $430.4 million in the comparable prior year period.

The increase in capital expenditures was primarily driven by our growth initiatives, including investments in distribution centers and stores to be opened in subsequent periods as well as stores opened in the current thirty-six week period.

During the thirty-six week periods ended May 4, 2024 and May 6, 2023, we opened 96 and 101 net new stores, respectively.

Investing cash flows were impacted by our wholly-owned captive, which purchased $17.6 million and sold $21.2 million in marketable debt securities during the thirty-six weeks ended May 4, 2024.

During the comparable prior year period, the captive purchased $48.4 million and sold $37.5 million in marketable debt securities.

Our investment in tax credit equity investments was $193.3 million during the thirty-six weeks ended May 4, 2024 compared to $50.7 million during the comparable prior year period.

Our net cash flows used in financing activities for the thirty-six weeks ended May 4, 2024 were $1.0 billion compared to $1.4 billion in the comparable prior year period.

During each of the thirty-six week periods ended May 4, 2024 and May 6, 2023, we received $1.0 billion in debt issuances.

We repaid our $300 million 3.125% Senior Notes due April 2024 and our $300 million 2.875% Senior Notes due January 2023 during the thirty-six weeks ended May 4, 2024 and May 6, 2023, respectively.

Stock repurchases were $2.4 billion in the current thirty-six week period as compared with $2.7 billion in the comparable prior year period.

The stock repurchases were primarily funded by cash flows from operations and increased borrowings.

For the thirty-six week period ended May 4, 2024 and the comparable prior year period, we had $631.3 million and $524.0 million in net proceeds from commercial paper, respectively.

Proceeds from the issuance of common stock from exercises of stock options for the thirty-six weeks ended May 4, 2024 and May 6, 2023 provided $154.4 million and $154.9 million, respectively.

During fiscal 2024, we are increasing the investment in our business as compared to fiscal 2023.

Our investment increases are primarily due to our supply chain initiatives, which include new distribution centers as well as expanded hubs and mega hubs, and new stores.

All of our material borrowing arrangements are described in greater detail in Note H – Financing in the Notes to Condensed Consolidated Financial Statements.

There were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 31, 2024.

For the twelve week periods ended November 23, 2024, and November 18, 2023, our net cash flows from operating activities provided $811.8 million and $830.3 million, respectively.

Our net cash flows used in investing activities for the twelve weeks ended November 23, 2024, were $265.7 million as compared with $270.5 million in the comparable prior year period.

Capital expenditures for the twelve weeks ended November 23, 2024, were $247.0 million compared to $235.4 million in the comparable prior year period.

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

During the twelve weeks ended November 23, 2024, and November 18, 2023, we opened 34 and 25 net new stores, respectively.

Investing cash flows were impacted by our wholly owned captive, which purchased $12.3 million and $4.1 million, and sold $12.6 million and $1.9 million in marketable debt securities during the twelve weeks ended November 23, 2024 and the comparable prior year period, respectively.

Our investment in tax credit equity investments was $31.0 million during the twelve weeks ended November 23, 2024, compared to $41.2 million during the comparable prior year period.

Our net cash flows used in financing activities for the twelve weeks ended November 23, 2024, were $538.1 million compared to $552.2 million in the comparable prior year period.

During the twelve weeks ended November 23, 2024, we had no debt issuances compared to $1.0 billion in debt issuances received in the comparable prior year period .

Stock repurchases were $540.1 million in the current twelve week period as compared with $1.5 billion in the comparable prior year period.

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

For the twelve week period ended November 23, 2024, and the comparable prior year period, we had $15.0 million and $76.9 million in net repayments of commercial paper, respectively.

Proceeds from the sale of common stock and exercises of stock options for the twelve weeks ended November 23, 2024, and November 18, 2023, provided $36.0 million and $41.4 million, respectively.

During fiscal 2025, we expect to increase the investment in our business as compared to fiscal 2024.

Our investments are expected to be directed primarily to our growth initiatives, which include new stores, new distribution centers, and hub and mega hub store expansion projects.

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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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 ratings or changes in the financial markets could limit the financial institutions’ willingness to participate in these arrangements.

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

We had an accounts payable to inventory ratio of 119.7% at May 4, 2024 and 126.5% at May 6, 2023.

A downgrade in our credit or changes in the financial markets could limit the financial institutions’ and our suppliers’ 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, benefitting our working capital and resulting in a high accounts payable to inventory ratio.

We had an accounts payable to inventory ratio of 119.5% at November 23, 2024, and 124.4% at November 18, 2023.

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 4, 2024, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 51.4% as compared to 55.2% for the comparable prior year period.

For the trailing four quarters ended November 23, 2024, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 47.7% as compared to 55.0% 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).

We use adjusted ROIC to evaluate whether we are effectively using our capital resources

and believe it is an important indicator of our overall operating performance.

We use adjusted ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.

Debt Facilities

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, we 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 Secured Overnight Financing Rate (“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 4, 2024, 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 4, 2024, we had $16.1 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 $128.5 million in letters of credit outstanding as of May 4, 2024.

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

As of May 4, 2024, the $1.8 billion commercial paper borrowings and the $400 million 3.250% Senior Notes due April 2025 were included in Long-term debt in the accompanying Condensed 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 4, 2024, 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 April 18, 2024, we repaid the $300 million 3.125% Senior Notes due April 2024.

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 issuances were used for general corporate purposes.

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

Our borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens.

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 4, 2024, 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 May 4, 2024 and was 2.3:1 as of May 6, 2023.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio as of November 23, 2024, and November 18, 2023, was 2.5:1.

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

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Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.

Debt Facilities

On November 15, 2024, we 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, 2028.

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

Our borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens.

All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs.

As of November 23, 2024, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

See Note H – Financing in the Notes to the Condensed Consolidated Financial Statements for additional information concerning our revolving credit agreement, outstanding letters of credit, surety bonds commitment and Senior Notes.

Stock Repurchases

From January 1, 1998 to May 4, 2024, we have repurchased a total of 154.9 million shares of our common stock at an aggregate cost of $36.3 billion, including 905.4 thousand shares of our common stock at an aggregate cost of $2.5 billion during the thirty-six week period ended May 4, 2024.

On December 20, 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 $37.7 billion.

Considering the cumulative repurchases as of May 4, 2024, we had $1.4 billion remaining under the Board’s authorization to repurchase our common stock.

Subsequent to May 4, 2024 and through May 31, 2024, we have repurchased 65.6 thousand shares of our common stock at an aggregate cost of $188.0 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 4, 2024, was $146.4 million, compared with $134.0 million at August 26, 2023, and our total surety bonds commitment at May 4, 2024, was $47.7 million, compared with $43.1 million at August 26, 2023.

Financial Commitments

Except for the $500 million 6.250% Senior Notes due November 2028 and $500 million 6.550% Senior Notes due November 2033 debt issuances, the $300 million 3.125% Senior Notes debt repayment and the $631.3 million 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 26, 2023.

See Note I – Stock Repurchase Program in the Notes to the Condensed Consolidated Financial Statements for information on our share repurchases.

Reconciliation of Non-GAAP Financial Measures

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Adjusted After-Tax ROIC

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended May 4, 2024 and May 6, 2023.

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended November 23, 2024, and November 18, 2023.

Trailing Four

24 unchanged sentences

Adjusted Debt to EBITDAR

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended May 4, 2024 and May 6, 2023.

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended November 23, 2024, and November 18, 2023.

Trailing Four

20 unchanged sentences

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 4, 2024 and May 6, 2023.

Trailing Four Quarters Ended

(in thousands)

November 23, 2024

November 18, 2023

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 4, 2024 and May 6, 2023 was 20.6% and 20.0%, respectively.

(2) Effective tax rate over trailing four quarters ended November 23, 2024, and November 18, 2023, was 20.5% and 20.8%, respectively.

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

Recent Accounting Pronouncements

Refer to “Note A – General” in the Condensed Consolidated Financial Statements for the discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 26, 2023.

There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended August 26, 2023.

Refer to Note A in the Notes to Condensed Consolidated Financial Statements for the discussion of recent accounting pronouncements.

Critical Accounting Estimates

Our critical accounting estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 31, 2024.

There have been no significant changes to our critical accounting estimates since the filing of our Annual Report on Form 10-K for the year ended August 31, 2024.

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