What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-06-13 compared with 2025-03-21 · 60 added, 70 removed, 201 unchanged (39% of the section changed)

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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 15, 2025, operated 6,483 stores in the U.S., 813 stores in Mexico and 136 stores in Brazil.

We began operations in 1979 and at May 10, 2025, operated 6,537 stores in the U.S., 838 stores in Mexico and 141 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 February 15, 2025, in 5,962 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.

At May 10, 2025, in 6,011 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.

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.

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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 15, 2025, are not necessarily indicative of the results that may be expected for the fiscal year ending August 30, 2025.

Operating results for the twelve and thirty-six weeks ended May 10, 2025, 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.

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Executive Summary

Net sales increased to $4.0 billion, a 2.4% increase over the comparable prior year period.

Net sales increased to $4.5 billion, a 5.4% increase over the comparable prior year quarter.

Operating profit decreased 3.8% to $866.2 million, net income decreased 6.6% to $608.4 million and diluted earnings per share decreased 3.6% to $35.36 for the quarter.

The second quarter was negatively impacted by unfavorable foreign currency exchange rates which had an overall impact to net sales of $91.1 million.

Operating profit comparison was negatively impacted $29.6 million due to unfavorable foreign currency exchange rates and $14.0 million due to non-cash LIFO favorability in the prior year quarter.

During the second 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.

The third quarter was negatively impacted by unfavorable foreign currency exchange rates which had an overall impact to net sales of $89.3 million.

Operating profit comparison was negatively impacted $27.1 million due to unfavorable foreign currency exchange rates and $8.0 million net due to an unfavorable non-cash LIFO impact.

During the third quarter of fiscal 2025, failure and maintenance related categories represented the largest portion of our sales mix at approximately 86% of total sales, whereas they represented approximately 85% of total sales in the comparable prior year period.

Failure related categories continue to be the largest portion of our sales mix.

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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.

For the twelve-month period ended December 2024, miles driven in the U.S.

For the twelve-month period ended March 2025, miles driven in the U.S.

increased 1.0% 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 February 15, 2025

Compared with Twelve Weeks Ended February 10, 2024

Net sales for the twelve weeks ended February 15, 2025, increased $92.9 million to $4.0 billion, or 2.4% over net sales of $3.9 billion for the comparable prior year period.

According to S&P Global Mobility, as of 2025 the average age of light vehicles on the road in the U.S.

was 12.8 years.

Twelve Weeks Ended May 10, 2025

Compared with Twelve Weeks Ended May 4, 2024

Net sales for the twelve weeks ended May 10, 2025, increased $228.9 million to $4.5 billion, or 5.4% over net sales of $4.2 billion for the comparable prior year period.

This growth was driven by an increase in total company same store sales of 5.4% on a constant currency basis and net sales of $97.2 million from new domestic and international stores, partially offset by a $89.3 million impact from unfavorable foreign currency exchange rates.

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Constant Currency (1)

February 15, 2025

February 10, 2024

February 15, 2025

February 10, 2024

International

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(1) Constant currency same store sales exclude impacts from fluctuations of foreign currency 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 February 15, 2025, and the comparable prior year period was $2.1 billion.

Gross profit, as a percentage of sales, was 53.9% for the twelve weeks ended February 15, 2025, and the comparable prior year period.

The current quarter gross margin comparison benefitted from higher merchandise margins, offset by a 36 basis point ($14.0 million) favorable non-cash LIFO adjustment in the comparable prior period.

Operating, selling, general and administrative expenses for the twelve weeks ended February 15, 2025, were $1.4 billion compared with $1.3 billion during the comparable prior year period.

Gross profit for the twelve weeks ended May 10, 2025, was $2.4 billion, compared with $2.3 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 52.7% for the twelve weeks ended May 10, 2025, compared to 53.5% for the comparable prior year period.

The decrease in gross margin was negatively impacted by higher inventory shrink, higher commercial mix, new distribution center startup costs and an unfavorable 21-basis point ($8 million net) non-cash LIFO impact .

Operating, selling, general and administrative expenses for the twelve weeks ended May 10, 2025, were $1.5 billion compared with $1.4 billion during the comparable prior year period.

As a percentage of sales, these expenses were 33.3% compared with 32.2% during the comparable prior year period.

The increase was primarily driven by investments to support our growth initiatives.

Net interest expense was $108.8 million and $102.6 million for the twelve weeks ended February 15, 2025, and February 10, 2024, respectively.

Average borrowings were $9.1 billion and $8.7 billion, and weighted average borrowing rates were 4.43% and 4.40% for the twelve weeks ended February 15, 2025, and February 10, 2024, respectively.

Our effective income tax rate was 18.4% and 19.6% of pretax income for the twelve weeks ended February 15, 2025, and February 10, 2024, respectively.

The decrease in the tax rate was impacted by an $18.4 million favorable valuation allowance adjustment related to our international business.

The benefit from stock options exercised was $14.3 million and $23.0 million for the twelve weeks ended February 15, 2025 and the comparable prior year period, respectively.

Net income for the twelve weeks ended February 15, 2025, decreased by $27.1 million from the comparable prior year period to $487.9 million due to the factors set forth above, and diluted earnings per share decreased by 2.1% to $28.29 from $28.89.

The increase was primarily driven by an increase in our self-insurance expense and investments to support our growth initiatives.

Net interest expense was $111.3 million and $104.4 million for the twelve weeks ended May 10, 2025, and May 4, 2024, respectively.

Average borrowings were $9.2 billion and $8.8 billion, and weighted average borrowing rates were 4.48% and 4.43% for the twelve weeks ended May 10, 2025, and May 4, 2024, respectively.

Our effective income tax rate was 19.4% and 18.1% of pretax income for the twelve weeks ended May 10, 2025, and May 4, 2024, respectively.

The benefit from stock options exercised was $22.7 million and $38.1 million for the twelve weeks ended May 10, 2025 and the comparable prior year period, respectively.

Net income for the twelve weeks ended May 10, 2025, decreased by $43.3 million from the comparable prior year period to $608.4 million due to the factors set forth above, and diluted earnings per share decreased by 3.6% to $35.36 from $36.69.

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 $0.26 per share.

Twenty-four Weeks Ended February 15, 2025

Compared with Twenty-four Weeks Ended February 10, 2024

Net sales for the twenty-four weeks ended February 15, 2025, increased $182.2 million to $8.2 billion, or 2.3% over net sales of $8.0 billion for the comparable prior year period.

Thirty-six Weeks Ended May 10, 2025

Compared with Thirty-six Weeks Ended May 4, 2024

Net sales for the thirty-six weeks ended May 10, 2025, increased $411.1 million to $12.7 billion, or 3.3% over net sales of $12.3 billion for the comparable prior year period.

This growth was driven by an increase in total company same store sales of 3.4% on a constant currency basis and net sales of $233.5 million from new domestic and international stores, partially offset by a $238.4 million impact from unfavorable foreign currency exchange rates.

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

Twenty-Four Weeks Ended

Thirty-Six Weeks Ended

Constant Currency (1)

February 15, 2025

February 10, 2024

February 15, 2025

February 10, 2024

International

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Gross profit for the twenty-four weeks ended February 15, 2025, was $4.4 billion, compared with $4.3 billion during the comparable prior year period.

Gross profit for the thirty-six weeks ended May 10, 2025, was $6.7 billion, compared with $6.6 billion during the comparable prior year period.

Gross profit, as a percentage of sales, was 53.2% compared to 53.4% during the comparable prior year period.

The gross margin comparison benefitted from higher merchandise margins partially offset by unfavorable supply chain costs driven by the opening of two new domestic distribution centers and a 27 basis point ($16.0 million) favorable non-cash LIFO adjustment in the comparable prior year period.

Operating, selling, general and administrative expenses for the twenty-four weeks ended February 15, 2025, were $2.8 billion compared with $2.7 billion during the comparable prior year period.

The decrease in gross margin was negatively impacted by higher supply chain costs, higher inventory shrink, and an unfavorable 20 basis point ($24.0 million net) non-cash LIFO impact, partially offset by higher merchandise margins.

Operating, selling, general and administrative expenses for the thirty-six weeks ended May 10, 2025, were $4.3 billion compared with $4.1 billion during the comparable prior year period.

As a percentage of sales, these expenses were 34.2% compared with 33.1% during the comparable prior year period.

The increase was primarily driven by investments to support our growth initiatives.

Net interest expense was $216.5 million and $194.0 million for the twenty-four weeks ended February 15, 2025, and February 10, 2024, respectively.

Average borrowings were $9.0 billion and $8.4 billion, and weighted average borrowing rates were 4.43% and 4.31% for the twenty-four week periods ended February 15, 2025, and February 10, 2024, respectively.

Our effective income tax rate was 20.9% and 20.7% of pretax income for the twenty-four weeks ended February 15, 2025, and February 10, 2024, respectively.

The increase was primarily driven by an increase in our self-insurance expense and investments to support our growth initiatives.

Net interest expense was $327.7 million and $298.4 million for the thirty-six weeks ended May 10, 2025, and May 4, 2024, respectively.

Average borrowings were $9.1 billion and $8.5 billion, and weighted average borrowing rates were 4.45% and 4.35% for the thirty-six week periods ended May 10, 2025, and May 4, 2024, respectively.

Our effective income tax rate was 20.4% and 19.8% of pretax income for the thirty-six weeks ended May 10, 2025, and May 4, 2024, respectively.

The tax rate was impacted by an $18.4 million favorable valuation allowance adjustment related to our international business.

The benefit from stock options exercised for the twenty-four week period ended February 15, 2025, was $19.5 million compared to $34.2 million in the comparable prior year period.

Net income for the twenty-four weeks ended February 15, 2025, decreased by $55.6 million from the comparable prior year period to $1.1 billion due to the factors set forth above, and diluted earnings per share decreased by 1.1% to $60.83 from $61.48.

The benefit from stock options exercised for the thirty-six week period ended May 10, 2025, was $42.3 million compared to $72.3 million in the comparable prior year period.

Net income for the thirty-six weeks ended May 10, 2025, decreased by $98.9 million from the comparable prior year period to $1.7 billion due to the factors set forth above, and diluted earnings per share decreased by 2.0% to $96.17 from $98.11.

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 $0.38.

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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 growth initiatives and return excess cash to shareholders in the form of share repurchases.

As of February 15, 2025, we held $300.9 million of cash and cash equivalents, as well as $2.2 billion in undrawn capacity on our Revolving Credit Agreement.

As of May 10, 2025, we held $268.6 million of cash and cash equivalents, as well as $2.2 billion in undrawn capacity on our Revolving Credit Agreement.

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.

All of our material borrowing arrangements are described in greater detail in “Note H – Financing” in the Notes to

Condensed Consolidated Financial Statements.

There have been 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 twenty-four week periods ended February 15, 2025, and February 10, 2024, our net cash flows from operating activities provided $1.4 billion and $1.3 billion, respectively.

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

Except for the issuance of $500 million 5.125% Senior Notes due June 2030, repayments of the $400 million 3.250% Senior Notes due April 2025 and the $500 million 3.625% Senior Notes

due April 2025, and the $225.5 million increase in commercial paper, there have been no material changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 31, 2024.

For the thirty-six week periods ended May 10, 2025, and May 4, 2024, our net cash flows from operating activities provided $2.2 billion and $1.9 billion, respectively.

Cash flows from operations increased over last year primarily due to favorable changes in accounts payable and accrued expenses.

Our net cash flows used in investing activities for the twenty-four weeks ended February 15, 2025, were $563.4 million as compared with $544.0 million in the comparable prior year period.

Capital expenditures for the twenty-four weeks ended February 15, 2025, were $539.7 million compared to $490.8 million in the comparable prior year period.

Our net cash flows used in investing activities for the thirty-six weeks ended May 10, 2025, were $917.3 million as compared with $916.3 million in the comparable prior year period.

Capital expenditures for the thirty-six weeks ended May 10, 2025, were $885.6 million compared to $725.9 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 twenty-four week periods ended February 15, 2025, and February 10, 2024, we opened 79 and 51 net new stores, respectively.

Investing cash flows were impacted by our wholly-owned captive, which purchased $31.3 million and $14.0 million, and sold $30.1 million and $12.6 million in marketable debt securities during the twenty-four weeks ended February 15, 2025, and the comparable prior year period, respectively.

Our investment in tax credit equity investments was $37.4 million and $42.5 million during the twenty-four weeks ended February 15, 2025, and the comparable prior year period, respectively.

Our net cash flows used in financing activities for the twenty-four weeks ended February 15, 2025, were $826.4 million compared to $692.8 million in the comparable prior year period.

During the twenty-four weeks ended February 15, 2025, we had no debt issuances compared to $1.0 billion in debt issuances in the comparable prior year period.

Stock repurchases were $866.5 million in the current twenty-four week period versus $1.7 billion in the comparable prior year period.

During the thirty-six week periods ended May 10, 2025, and May 4, 2024, we opened 163 and 96 net new stores, respectively.

Investing cash flows were impacted by our wholly-owned captive, which purchased $54.3 million and $17.6 million, and sold $54.8 million and $21.2 million in marketable debt securities during the thirty-six weeks ended May 10, 2025, and the comparable prior year period, respectively.

Our investment in tax credit equity investments was $50.4 million and $193.3 million during the thirty-six weeks ended May 10, 2025, and the comparable prior year period, respectively.

Our net cash flows used in financing activities for the thirty-six weeks ended May 10, 2025, were $1.3 billion compared to $1.0 billion in the comparable prior year period.

During the thirty-six weeks ended May 10, 2025, we had $500 million in debt issuances compared to $1.0 billion in debt issuances in the comparable prior year period, and $900 million in debt repayments compared to $300 million in debt repayments in the comparable prior year period.

Stock repurchases were $1.1 billion in the current thirty-six week period versus $2.4 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 15, 2025, we had $22.0 million in net proceeds from commercial paper, and in the comparable prior year period we had $32.2 million in net repayments of commercial paper.

Proceeds from the issuance of common stock from exercises of stock options for the twenty-four weeks ended February 15, 2025, and February 10, 2024, provided $64.3 million and $98.3 million, respectively.

For the thirty-six week periods ended May 10, 2025, and May 4, 2024, we had $225.5 million and $631.3 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 10, 2025, and May 4, 2024, provided $111.0 million and $154.4 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 g rowth initiatives, which include new stores, new distribution centers, and hub and mega hub store expansion projects .

Our investments are expected to be directed primarily to our g rowth initiatives, which include new stores 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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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 118.2% at February 15, 2025, and 119.8% at February 10, 2024.

We had an accounts payable to inventory ratio of 115.6% at May 10, 2025, and 119.7% at May 4, 2024.

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 15, 2025, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 45.5% as compared to 53.5% for the comparable prior year period.

For the trailing four quarters ended May 10, 2025, our adjusted after-tax return on invested capital (“ROIC”), which is a non-GAAP measure, was 43.5% 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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Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense (“EBITDAR”) ratio, which is a non-GAAP measure, was 2.5:1 as of February 15, 2025, and 2.4:1 as of February 10, 2024.

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

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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 February 15, 2025, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.

As of May 10, 2025, 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.

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Adjusted After-Tax ROIC

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended February 15, 2025, and February 10, 2024.

The following tables calculate the percentages of adjusted ROIC for the trailing four quarters ended May 10, 2025, and May 4, 2024.

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 15, 2025, and February 10, 2024.

The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters ended May 10, 2025, and May 4, 2024.

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 15, 2025, and February 10, 2024.

Trailing Four Quarters Ended

(in thousands)

February 15, 2025

February 10, 2024

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 15, 2025, and February 10, 2024, was 20.3% and 20.5%, respectively.

(2) Effective tax rate over trailing four quarters ended May 10, 2025, and May 4, 2024, was 20.6%.

(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