AUTOZONE, INC.

AZO
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AUTOZONE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

12/20/2019 | 04:37pm


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
$.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.

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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% at November 23, 2019,
compared to 108.9% at November 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 ended November 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 of November 18, 2017 (the "Extension Amendment") to the Third Amended and
Restated Credit Agreement dated as of November 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 from
November 18, 2021 until November 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 of November 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 of
November 23, 2019, we had $20.2 million in letters of credit outstanding under
the letter of credit facility, which expires in June 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 of November 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 of November 23, 2019,
we were in compliance with all covenants and expect to remain in compliance with
all covenants under our borrowing arrangements.
As of November 23, 2019, the $1.110 billion of commercial paper borrowings and
the $500 million 4.000% Senior Notes due November 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 of November 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 of November 23, 2019 and
was 2.5:1 as of November 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.

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Stock Repurchases
From January 1, 1998 to November 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 ended November 23, 2019. On
October 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 of November 23, 2019, we
had $1.277 billion remaining under the Board's authorization to repurchase our
common stock.
Subsequent to November 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 at November 23, 2019, was $247.6 million, compared
with $101.2 million at August 31, 2019, and our total surety bonds commitment at
November 23, 2019, was $42.1 million, compared with $36.7 million at August 31,
2019
.
Financial Commitments
As of November 23, 2019, 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, 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.

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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 ended November 23, 2019 and November 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 November 23,
2019


$


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 ended November 23, 2019


(6,207 )




Rent expense for the 12 weeks ended November 23, 2019


75,592



Add: Rent expense for the 41 weeks ended August 31, 2019, as
previously reported prior to the adoption of ASC 842



261,510




Rent expense for the 53 weeks ended November 23, 2019 $ 337,102









(2) Effective tax rate over trailing four quarters ended November 23, 2019 is



20.7%. Effective tax rate over trailing four quarters ended November 17, 2018



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.











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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 ended November 23, 2019 and November 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 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 November 23,
2019


$


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 ended November 23, 2019


(6,207 )




Rent expense for the 12 weeks ended November 23, 2019


75,592



Add: Rent expense for the 41 weeks ended August 31, 2019, as
previously reported prior to the adoption of ASC 842



261,510




Rent expense for the 53 weeks ended November 23, 2019 $ 337,102


















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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 ended August 31, 2019. Our critical accounting policies have not
changed since the filing of our Annual Report on Form
10-K
for the year ended August 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




At November 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 of November 23,
2019
and $5.419 billion as of August 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 at November 23, 2019 and greater than
the carrying value by $212.7 million at August 31, 2019. We had $1.110 billion
of variable rate debt outstanding at November 23, 2019 and $1.030 billion of
variable rate debt outstanding at August 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 at November 23, 2019 and $4.176 billion, net of unamortized debt
issuance costs of $23.7 million at August 31, 2019. A one percentage point
increase in interest rates would reduce the fair value of our fixed rate debt by
$168.5 million at November 23, 2019.
Item 4. Controls and Procedures




Evaluation of Disclosure Controls and Procedures
As of November 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 of November 23,
2019
.
Changes in Internal Controls
During the first quarter ended November 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 ended November 23, 2019 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

24



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