AUTOZONE, INC.
In Management's Discussion and Analysis ("MD&A"), we provide a historical and
prospective narrative of our general financial condition, results of operations,
liquidity and certain other factors that may affect the future results of
AutoZone, Inc. ("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 31, 2019 and other filings with the SEC .
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form
10-Q
constitute forward-looking statements that are subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
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 and perception of historical trends, current conditions, expected
future developments and other factors that we believe to be appropriate. These
forward-looking statements are subject to a number of risks and uncertainties,
including without limitation: product demand; energy prices; weather;
competition; credit market conditions; cash flows; access to available and
feasible financing; future stock repurchases; the impact of recessionary
conditions; consumer debt levels; changes in laws or regulations; war and the
prospect of war, including terrorist activity; inflation; the ability to hire,
train and retain qualified employees; construction delays; the compromising of
confidentiality, availability, or integrity of information, including cyber
attacks; historic growth rate sustainability; downgrade of our credit ratings;
damages to our reputation; challenges in international markets; failure or
interruption of our information technology systems; origin and raw material
costs of suppliers; impact of tariffs; anticipated impact of new accounting
standards; and business interruptions. Certain of these risks and uncertainties
are discussed in more detail in the "Risk Factors" section contained in Item 1A
under Part 1 of our Annual Report on Form
10-K
for the year ended August 31, 2019 , and these Risk Factors should be read
carefully. Forward-looking statements are not guarantees of future performance
and actual results, developments and business decisions may differ from those
contemplated by such forward-looking statements, and events described above and
in the "Risk Factors" could materially and adversely affect our business.
Forward-looking statements speak only as of the date made. Except as required by
applicable law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results may materially differ from anticipated
results.
Overview
We are the leading retailer, and a leading distributor, of automotive
replacement parts and accessories in the Americas . We began operations in 1979
and at November 23, 2019 , operated 5,790 stores in the U.S. , 606 stores in
Mexico ; and 37 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 November 23, 2019 , in 4,917 of our domestic stores, we also had a
commercial sales program that provides commercial credit and prompt delivery of
parts and other products to local, regional and national repair garages,
dealers, service stations and public sector accounts. We also have commercial
programs in stores in Mexico and Brazil . We also sell the ALLDATA brand
automotive diagnostic and repair software through www.alldata.com and
www.alldatadiy.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 also provide product information on
our Duralast branded products through www.duralastparts.com. We do not derive
revenue from automotive repair or installation services.
Operating results for the twelve weeks ended November 23, 2019 are not
necessarily indicative of the results that may be expected for the fiscal year
ending August 29, 2020 . 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 2020 has 16 weeks and the fourth quarter of fiscal 2019
had 17 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 were up 5.7% for the quarter driven by an increase in domestic same
store sales (sales from stores open at least one year) of 3.4% and new AutoZone
stores. Operating profit increased 2.5% to $500.0 million , while net income for
the quarter decreased 0.3% over the same period last year driven by an increased
effective tax rate resulting from a reduced benefit from stock options exercised
during the quarter compared to the prior year quarter. Diluted earnings per
share increased 6.2% to $14.30 per share from $13.47 per share in the comparable
prior year period.
Our business is impacted by various factors within the economy that affect both
our consumer and our industry, including but not limited to fuel costs, wage
rates 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 first quarter of fiscal 2020, failure and maintenance related
categories represented the largest portion of our sales mix, at approximately
86% of total sales with discretionary making up the remaining, which is
consistent with the comparable prior year period, with failure related
categories continuing to be the largest portion of our sales mix. We did not
experience any fundamental shifts in our category
sales mix as compared to the previous year. Our sales mix can be impacted by
severe or unusual weather over a short-term period. Over the long-term, we
believe the impact of the weather on our sales mix is not significant.
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Table of Contents
The two statistics we believe have the most positive 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 positive
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 the number of seven year old or older vehicles on the road. The
average age of the U.S. light vehicle fleet continues to trend in our industry's
favor. According to the latest data provided by the Auto Care Association as of
January 1, 2019 , for the 8
th
consecutive year, the average age of vehicles on the road has exceeded 11 years.
Since the beginning of the fiscal year and through September 2019 (latest
publicly available information), miles driven in the U.S. increased 1.7%
compared to the same period in the prior year.
Twelve Weeks Ended November 23, 2019
Compared with Twelve Weeks Ended November 17, 2018
Net sales for the twelve weeks ended November 23, 2019 increased $151.3 million
to $2.793 billion , or 5.7%, over net sales of $2.642 billion for the comparable
prior year period. Total auto parts sales increased by 5.8%, primarily driven by
an increase in domestic same store sales of 3.4% and net sales of $49.1 million
from new AutoZone stores. Domestic commercial sales increased $74.6 million , or
13.6%, over the comparable prior year period.
Gross profit for the twelve weeks ended November 23, 2019 was $1.501 billion ,
compared with $1.417 billion during the comparable prior year period. Gross
profit, as a percentage of sales, was relatively flat to last year at 53.7%.
Operating, selling, general and administrative expenses for the twelve weeks
ended November 23, 2019 were $1.001 billion , or 35.8% of net sales, compared
with $929.7 million , or 35.2% of net sales, during the comparable prior year
period. Operating expenses, as a percentage of sales, were higher than last year
with deleverage primarily driven by domestic store payroll and benefits.
Net interest expense for the twelve weeks ended November 23, 2019 was
$43.7 million compared with $39.0 million during the comparable prior year
period. The increase was primarily due to an increase in borrowing levels over
the comparable prior year period. Average borrowings for the twelve weeks ended
November 23, 2019 were $5.190 billion , compared with $4.972 billion for the
comparable prior year period. Weighted average borrowing rates were 3.1% for
each of the twelve week periods ended November 23, 2019 and November 17, 2018 .
Our effective income tax rate was 23.2% of pretax income for the twelve weeks
ended November 23, 2019 and 21.7% for the comparable prior year period. The
increase in the tax rate was primarily attributable to a reduced benefit from
stock options exercised during the quarter. The benefit of stock options
exercised in the current quarter was $1.5 million compared to $11.2 million in
the prior year quarter.
Net income for the twelve week period ended November 23, 2019 decreased by
$1.1 million to $350.3 million due to the factors set forth above, and diluted
earnings per share increased by 6.2% to $14.30 from $13.47 in the comparable
prior year period. For the twelve weeks ended November 23, 2019 and November 17,
2018 , earnings per share includes excess tax benefits from stock option
exercises of $0.06 per share and $0.43 per share, respectively. 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 $0.70 .
Liquidity and Capital Resources
The primary source of our liquidity is our cash flows realized through the sale
of automotive parts, products and accessories. For the twelve weeks ended
November 23, 2019 , our net cash flows from operating activities provided
$447.1 million as compared with $449.2 million provided during the comparable
prior year period. The decrease is primarily due to the timing of accrued
payments.
Our net cash flows used in investing activities for the twelve weeks ended
November 23, 2019 was $90.7 million as compared with $91.9 million in the
comparable prior year period. Capital expenditures for the twelve weeks ended
November 23, 2019 were $101.4 million compared to $98.2 million for the
comparable prior year period. The increase is primarily driven by increased
store openings compared to the comparable prior year period. During the twelve
week period ended November 23, 2019 , we opened 22 net new stores. In the
comparable prior year period, we opened 16 net new stores. Investing cash flows
were impacted by our wholly owned captive, which purchased $35.4 million and
sold $45.8 million in marketable debt securities during the twelve weeks ended
November 23, 2019 . During the comparable prior year period, the captive
purchased $7.5 million in marketable debt securities and sold $13.1 million in
marketable debt securities.
Our net cash flows used in financing activities for the twelve weeks ended
November 23, 2019 were $375.8 million compared to $315.6 million in the
comparable prior year period. For the twelve week period ended November 23,
2019 , our commercial paper activity resulted in $79.7 million in net proceeds,
as compared to $149.4 million in net proceeds in the comparable prior year
period. For the twelve weeks ended November 23, 2019 , proceeds from the sale of
common stock and exercises of stock options provided $8.8 million . In the
comparable prior year period, proceeds from the sale of common stock and
exercises of stock options provided $44.7 million .
During fiscal 2020, we expect to increase the investment in our business as
compared to fiscal 2019. Our investments continue to be directed primarily to
new stores, investments in technology, supply chain infrastructure and
enhancements to existing stores. The amount of our investments in our new stores
is impacted by different factors, including such factors as whether the building
and land are purchased (requiring higher investment) or leased (generally lower
investment), located in the United States , Mexico or Brazil , or located in urban
or rural areas.
19
-------------------------------------------------------------------------------- Table of Contents In addition to the building and land costs, our new stores require working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio. 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 financing arrangements with financial institutions whereby they factor their receivables from us, allowing them to receive payment on our invoices at a discounted rate. 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 110.3% atNovember 23, 2019 , compared to 108.9% atNovember 17, 2018 . The increase was primarily due to more favorable vendor terms. 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. The balance may be funded through new borrowings. We anticipate that we will be able to obtain such financing in view of our current credit ratings and favorable experiences in the debt markets in the past. For the trailing four quarters endedNovember 23, 2019 , our adjusted after-tax return on invested capital ("ROIC") was 35.5% as compared to 33.7% for the comparable prior year period. 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 We entered into a Master Extension, New Commitment and Amendment Agreement dated as ofNovember 18, 2017 (the "Extension Amendment") to the Third Amended and Restated Credit Agreement dated as ofNovember 18, 2016 , as amended, modified, extended or restated from time to time (the "Revolving Credit Agreement"). Under the Extension Amendment: (i) our borrowing capacity under the Revolving Credit Agreement was increased from$1.6 billion to$2.0 billion ; (ii) our option to increase the borrowing capacity under the Revolving Credit Agreement was "refreshed" and the amount of such option remained at$400 million ; (iii) the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from$2.0 billion to$2.4 billion ; (iv) the termination date of the Revolving Credit Agreement was extended fromNovember 18, 2021 untilNovember 18, 2022 ; and (v) we have the option to make one additional written request of the lenders to extend the termination date then in effect for an additional year. Under the Revolving Credit Agreement, we may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon our senior, unsecured, (non-credit enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the Revolving Credit Agreement. As ofNovember 23, 2019 , we had$3.2 million of outstanding letters of credit under the 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 ofNovember 23, 2019 , we had$20.2 million in letters of credit outstanding under the letter of credit facility, which expires inJune 2022 . In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had$224.2 million in letters of credit outstanding as ofNovember 23, 2019 . These letters of credit have various maturity dates and were issued on an uncommitted basis. All senior notes are subject to an interest rate adjustment if the debt ratings assigned to the senior notes are downgraded (as defined in the agreements). Further, the senior notes contain a provision that repayment of the senior notes may be accelerated if we experience a change in control (as defined in the agreements). Our borrowings under our senior notes contain minimal covenants, primarily restrictions on liens. Under our revolving credit facilities, 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. 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 ofNovember 23, 2019 , we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements. As ofNovember 23, 2019 , the$1.110 billion of commercial paper borrowings and the$500 million 4.000% Senior Notes dueNovember 2020 were classified as long-term in the Consolidated Balance Sheets as we had the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit facilities. As ofNovember 23, 2019 , we had$1.997 billion of availability under our$2.0 billion revolving credit facilities, which would allow us to replace these short-term obligations with long-term financing facilities. Our adjusted debt to earnings before interest, taxes, depreciation, amortization, and rent ("EBITDAR") ratio was 2.5:1 as ofNovember 23, 2019 and was 2.5:1 as ofNovember 17, 2018 . We calculate adjusted debt as the sum of total debt, finance lease liabilities and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent, share-based expense, impairment charges, pension termination charges and deferred tax liabilities to net income. Adjusted debt to EBITDAR is calculated on a trailing four quarter basis. We target our debt levels to a ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings. We believe this is important information for the management of our debt levels. To the extent EBITDAR continues to grow in future years, we expect our debt levels to increase; conversely, if EBITDAR declines, we would expect our debt levels to decrease. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for further details of our calculation. 20 -------------------------------------------------------------------------------- Table of Contents Stock Repurchases FromJanuary 1, 1998 toNovember 23, 2019 , we have repurchased a total of 147.3 million shares of our common stock at an aggregate cost of$21.873 billion , including 403,107 shares of our common stock at an aggregate cost of$450.0 million during the twelve week period endedNovember 23, 2019 . OnOctober 7, 2019 , the Board voted to increase the authorization by$1.25 billion . This raised the total value of shares authorized to be repurchased to$23.15 billion . Considering cumulative repurchases as ofNovember 23, 2019 , we had$1.277 billion remaining under the Board's authorization to repurchase our common stock. Subsequent toNovember 23, 2019 , we have repurchased 101,815 shares of our common stock at an aggregate cost of$120.0 million . Off-Balance Sheet Arrangements Since our fiscal year end, we have cancelled, 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 atNovember 23, 2019 , was$247.6 million , compared with$101.2 million atAugust 31, 2019 , and our total surety bonds commitment atNovember 23, 2019 , was$42.1 million , compared with$36.7 million atAugust 31, 2019 . Financial Commitments As ofNovember 23, 2019 , there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year endedAugust 31, 2019 . Reconciliation of Non-GAAP Financial Measures Management's Discussion and Analysis of Financial Condition and Results of Operations includes certain financial measures not derived in accordance with GAAP. These non-GAAP financial measures provide additional information for determining our optimum capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders' value. Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented non-GAAP financial measures, as we believe they provide additional information that is useful to investors. Furthermore, our management and the Compensation Committee of the Board use the above mentioned non-GAAP financial measures to analyze and compare our underlying operating results and to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables. 21 --------------------------------------------------------------------------------
Table of Contents Reconciliation of Non-GAAP Financial Measure: Adjusted After-Tax ROIC The following tables calculate the percentages of adjusted ROIC for the trailing four quarters endedNovember 23, 2019 andNovember 17, 2018 . A B A-B=C D C+D Fiscal Year Twelve Forty-One Twelve Trailing Four Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended August 31, November 17, August 31, November 23, November 23, (in thousands, except percentage) 2019 2018 2019 2019 2019 Net income$ 1,617,221 $ 351,406 $ 1,265,815 $ 350,338 $ 1,616,153 Adjustments: Interest expense 184,804 39,006 145,798 43,743 189,541 Rent expense (1) 332,726 71,216 261,510 75,592 337,102 Tax effect (2) (107,129 ) (22,816 ) (84,313 ) (24,702 ) (109,015 ) Deferred tax liabilities, net of repatriation tax (6,340 ) - (6,340 ) - (6,340 ) Adjusted after-tax return$ 2,021,282 $ 438,812 $ 1,582,470 $ 444,971 $ 2,027,441 Average debt (3)$ 5,182,565 Average stockholders' deficit (3) (1,666,486 ) Add: Rent x 6 (1) 2,022,612 Average finance lease liabilities (3) 170,863 Pre-tax invested capital$ 5,709,554 Adjusted after-tax ROIC 35.5% A B A-B=C D C+D Fiscal Year Twelve Forty Twelve Trailing Four Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended August 25, November 18, August 25, November 17, November 17, (in thousands, except percentage) 2018 2017 2018 2018 2018 Net income$ 1,337,536 $ 281,003 $ 1,056,533 $ 351,406 $ 1,407,939 Adjustments: Impairment before tax 193,162 - 193,162 - 193,162 Pension termination charges before tax 130,263 - 130,263 - 130,263 Interest expense 174,527 38,889 135,638 39,006 174,644 Rent expense 315,580 69,655 245,925 71,216 317,141 Tax effect (2) (211,806 ) (36,362 ) (175,444 ) (25,773 ) (201,217 ) Deferred tax liabilities, net of repatriation tax (132,113 ) - (132,113 ) - (132,113 ) Adjusted after-tax return$ 1,807,149 $ 353,185 $ 1,453,964 $ 435,855 $ 1,889,819 Average debt (3)$ 5,028,638 Average stockholders' deficit (3) (1,479,244 ) Add: Rent x 6 1,902,846 Average finance lease liabilities (3) 157,763 Pre-tax invested capital$ 5,610,003 Adjusted after-tax ROIC 33.7% (1) Effective September
1, 2019, the Company adopted ASU
2016-02,
Leases (Topic 842), the new lease accounting standard that required the
Company to recognize operating lease assets and liabilities in the balance
sheet. 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 12 weeks ended November
23, 2019 .
Total lease cost per ASC 842, for the 12 weeks ended
$ 95,840
Less: Finance lease interest and amortization (14,041 ) Less: Variable operating lease components, related to insurance and common area maintenance for the 12 weeks endedNovember 23, 2019
(6,207 )
Rent expense for the 12 weeks endedNovember 23, 2019
75,592
Add: Rent expense for the 41 weeks ended
261,510
Rent expense for the 53 weeks ended November 23, 2019$ 337,102
(2) Effective tax rate over trailing four quarters ended
20.7%. Effective tax rate over trailing four quarters ended
is 24.2% for impairment, 28.1% for pension termination and 23.4% for interest
and rent expense.
(3) All averages are computed based on trailing 5 quarter balances.
22
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Table of Contents Reconciliation of Non-GAAP Financial Measure: Adjusted Debt to EBITDAR The following tables calculate the ratio of adjusted debt to EBITDAR for the trailing four quarters endedNovember 23, 2019 andNovember 17, 2018 . A B A-B=C D C+D Fiscal Year Twelve Weeks Forty-One Twelve Trailing Four Ended Ended Weeks Ended Weeks Ended Quarters Ended August 31, November 17, August 31, November 23, November 23,
(in thousands, except ratio) 2019 2018 2019 2019 2019 Net income$ 1,617,221 $ 351,406 $ 1,265,815 $ 350,338 $ 1,616,153 Add: Interest expense 184,804 39,006 145,798 43,743 189,541 Income tax expense 414,112 97,406 316,706 105,942 422,648 Adjusted EBIT 2,216,137 487,818 1,728,319 500,023 2,228,342 Add: Depreciation expense 369,957 82,452 287,505 89,750 377,255 Rent expense 332,726 71,216 261,510 75,592 337,102 Share-based expense 43,255 10,527 32,728 9,996 42,724 Adjusted EBITDAR$ 2,962,075 $ 652,013 $ 2,310,062 $ 675,361 $ 2,985,423 Debt$ 5,287,324 Finance lease liabilities 195,663 Add : Rent x 6 (1) 2,022,612 Adjusted debt$ 7,505,599 Adjusted debt to EBITDAR 2.5 A B A-B=C D C+D Fiscal Year Twelve Weeks Forty Twelve Trailing Four Ended Ended Weeks Ended Weeks Ended Quarters Ended August 25, November 18, August 25, November 17, November 17, (in thousands, except ratio) 2018 2017 2018 2018 2018 Net income$ 1,337,536 $ 281,003 $ 1,056,533 $ 351,406 $ 1,407,939 Add: Impairment before tax 193,162 - 193,162 - 193,162 Pension termination charges before tax 130,263 - 130,263 - 130,263 Interest expense 174,527 38,889 135,638 39,006 174,644 Income tax expense 298,793 148,862 149,931 97,406 247,337 Adjusted EBIT 2,134,281 468,754 1,665,527 487,818 2,153,345 Add: Depreciation expense 345,084 77,986 267,098 82,452 349,550 Rent expense 315,580 69,655 245,925 71,216 317,141 Share-based expense 43,674 11,086 32,588 10,527 43,115 Adjusted EBITDAR$ 2,838,619 $ 627,481 $ 2,211,138 $ 652,013 $ 2,863,151 Debt$ 5,156,037 Finance lease liabilities 158,284 Add: Rent x 6 1,902,846 Adjusted debt$ 7,217,167 Adjusted debt to EBITDAR 2.5
(1) Effective
2016-02,
Leases (Topic 842), the new lease accounting standard that required the
Company to recognize operating lease assets and liabilities in the balance
sheet. 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 12 weeks ended
Total lease cost per ASC 842, for the 12 weeks ended
$ 95,840
Less: Finance lease interest and amortization (14,041 ) Less: Variable operating lease components, related to insurance and common area maintenance for the 12 weeks endedNovember 23, 2019
(6,207 )
Rent expense for the 12 weeks endedNovember 23, 2019
75,592
Add: Rent expense for the 41 weeks ended
261,510
Rent expense for the 53 weeks ended November 23, 2019$ 337,102 23
-------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements Refer to Note A of the Notes to Condensed Consolidated Financial Statements for the discussion of recent accounting pronouncements. Critical Accounting Policies and Estimates Preparation of our consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent liabilities. Our policies are evaluated on an ongoing basis, and our significant judgments and estimates are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. 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 endedAugust 31, 2019 . Our critical accounting policies have not changed since the filing of our Annual Report on Form 10-K for the year endedAugust 31, 2019 . The Company has not made any changes in these critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market Risk
AtNovember 23, 2019 , the only material change to our instruments and positions that are sensitive to market risk since the disclosures in our 2019 Annual Report to Stockholders was the$79.7 million net increase in commercial paper. The fair value of our debt was estimated at$5.468 billion as ofNovember 23, 2019 and$5.419 billion as ofAugust 31, 2019 , based on the quoted market prices for the same or similar debt issues or on the current rates available to AutoZone for debt of the same terms. Such fair value was greater than the carrying value of debt by$180.6 million atNovember 23, 2019 and greater than the carrying value by$212.7 million atAugust 31, 2019 . We had$1.110 billion of variable rate debt outstanding atNovember 23, 2019 and$1.030 billion of variable rate debt outstanding atAugust 31, 2019 . At these borrowing levels for variable rate debt, a one percentage point increase in interest rates would have had an unfavorable annual impact on our pre-tax earnings and cash flows of$11.1 million in fiscal 2020. The primary interest rate exposure on variable rate debt is based on LIBOR. We had outstanding fixed rate debt of$4.178 billion , net of unamortized debt issuance costs of$22.4 million atNovember 23, 2019 and$4.176 billion , net of unamortized debt issuance costs of$23.7 million atAugust 31, 2019 . A one percentage point increase in interest rates would reduce the fair value of our fixed rate debt by$168.5 million atNovember 23, 2019 . Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures As ofNovember 23, 2019 , an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as ofNovember 23, 2019 . Changes in Internal Controls During the first quarter endedNovember 23, 2019 , we adopted the new accounting standard under ASU 2016-02, Leases (Topic 842) (Refer to "Note A - General" and "Note L - Leases"), and as a result, we modified the related internal controls over financial reporting. There have been no other changes in our internal control over financial reporting during the quarter endedNovember 23, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 24
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