AUTOZONE, INC. In Management's Discussion and Analysis of Financial Condition and Results of
Operations ("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 29, 2020 and other filings wemake with theSEC . 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; risks associated with self -insurance; war and the prospect of war, including terrorist activity; the impact of public health issues, such as the ongoing global coronavirus ("COVID-19") pandemic; 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; disruption in our supply chain; 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 endedAugust 29, 2020 , and these Risk Factors should be read carefully. Forward-looking statements are not guarantees of future performance, 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. However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward-looking statements. 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. Overview We are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in theAmericas . We began operations in 1979 and atMay 8, 2021 operated 5,975 stores in theU.S. , 635 stores inMexico and 47 stores inBrazil . 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. AtMay 8, 2021 in 5,107 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 all stores inMexico andBrazil . We sell the ALLDATA brand automotive diagnostic and repair software through www.alldata.com. Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com and our commercial customers can make purchases through www.autozonepro.com. We also provide product information on our Duralast branded products through www.duralastparts.com. We do not derive revenue from automotive repair or installation services. 17 Table of Contents
Operating results for the twelve and thirty-six weeks endedMay 8, 2021 are not necessarily indicative of the results that may be expected for the fiscal year endingAugust 28, 2021 . Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarters of fiscal 2021 and 2020 each have 16 weeks. Our business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September, and the lowest sales generally occurring in the months of December and January.
COVID-19 Impact
The COVID-19 pandemic continues to impact numerous aspects of our business. Our sales remain at an elevated level compared to sales prior to the pandemic, as we believe the additional pandemic-related government stimulus benefitted many of our customers. Our main priority continues to be the health, safety and well-being of our customers and employees. For fiscal 2021, we have incurred approximately$46 million in pandemic related expenses, including Emergency Time Off ("ETO") benefit enhancements as compared to approximately$75 million in the comparable prior year period. The long-term impact to our business remains unknown as we are unable to accurately predict the impact COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, the impact of variants of the disease, the distribution and efficacy of vaccines, the speed at which such vaccines are administered, actions that may be taken by governmental authorities intended to minimize the spread of the pandemic or to stimulate the economy and other unintended consequences. Accordingly, business disruption related to the COVID-19 outbreak may continue to cause significant fluctuations in our business, unusually impacting demand for our products, our store hours and our workforce availability and magnify risks associated with our business and operations. See "Risk Factors-The ongoing outbreak of COVID-19 has been declared a pandemic by theWorld Health Organization , continues to spread withinthe United States and many other parts of the world and may have a material adverse effect on our business operations, financial condition, liquidity and cash flow" in our Annual Report on Form 10-K for additional information.
Executive Summary
Net sales increased 31.4% for the quarter endedMay 8, 2021 compared to the prior year period, which was driven by an increase in domestic same store sales (sales from stores open at least one year) of 28.9%. Domestic commercial sales increased 44.4%, which represents approximately 23% of our total sales. Operating profit increased 63.4% to$803.5 million compared to$491.7 million . Net income for the quarter increased 73.9% to$596.2 million compared to$342.9 million . Diluted earnings per share increased 84.0% to$26.48 per share from$14.39 per share. The increase in net income for the quarter endedMay 8, 2021 was driven by strong topline growth. 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, including the effects of, and responses to, COVID-19. Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future. During the third quarter of fiscal 2021, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 82% of total sales, which is consistent with the comparable prior year period, with failure related categories continuing to be the largest portion of our sales mix. While we have not experienced any fundamental shifts in our category sales mix as compared to the previous year, in our domestic stores we continue to experience a slight increase in mix of sales of the discretionary category as compared to previous quarters. We believe the improvement in this sales category continues to benefit from the pandemic as many of our customers spent more time and money to work on projects. 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 close correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we 18 Table of Contents
believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road. The average age of theU.S. light vehicle fleet continues to trend in our industry's favor. According to the latest data provided by theAuto Care Association in the 2021 Auto Care Factbook, for the ninth consecutive year, the average age of vehicles on the road has exceeded 11 years. Since the beginning of the fiscal year and throughMarch 2021 (latest publicly available information), miles driven in theU.S. decreased 7.2% compared to the same period in the prior year; however, theMarch 2021 data showed significant improvement in the number of miles driven. We believe the increase in miles driven is due to the nation beginning to return to pre-pandemic levels, but we are unable to predict if the increase will continue or the extent of the impact it will have on our business.
Twelve Weeks Ended
Compared with Twelve Weeks Ended
Net sales for the twelve weeks endedMay 8, 2021 increased$871.7 million to$3.651 billion , or 31.4% over net sales of$2.779 billion for the comparable prior year period. Total auto parts sales increased by 31.8%, primarily driven by an increase in domestic same store sales of 28.9% and net sales of$51.5 million from new stores. Domestic commercial sales increased$254.8 million to$828.6 million , or 44.4%, over the comparable prior year period. Gross profit for the twelve weeks endedMay 8, 2021 was$1.915 billion , compared with$1.491 billion during the comparable prior year period. Gross profit, as a percentage of sales was 52.4% compared to 53.6% during the comparable prior year period. The decrease in gross margin was primarily driven by the accelerated growth in our Commercial business and our investment in pricing initiatives. Operating, selling, general and administrative expenses for the twelve weeks endedMay 8, 2021 were$1.111 billion , or 30.4% of net sales, compared with$999.0 million , or 35.9% of net sales during the comparable prior year period. The decrease in operating expenses, as a percentage of sales, was driven by strong sales growth and approximately$75 million in pandemic related expenses, including ETO for our AutoZoners, incurred in the prior year. Net interest expense for the twelve weeks endedMay 8, 2021 was$45.0 million compared with$47.5 million during the comparable prior year period. The decrease was primarily due to a decrease in the weighted average borrowing rate. Average borrowings for the twelve weeks endedMay 8, 2021 were$5.351 billion , compared with$5.460 billion for the comparable prior year period. Weighted average borrowing rates were 3.3% and 3.4% for the quarter endedMay 8, 2021 andMay 9, 2020 , respectively. Our effective income tax rate was 21.4% of pretax income for the twelve weeks endedMay 8, 2021 , and 22.8% for the comparable prior year period. The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during the twelve weeks endedMay 8, 2021 . The benefit of stock options exercised for the twelve weeks endedMay 8, 2021 was$16.0 million compared to$1.1 million in the comparable prior year period. Net income for the twelve week period endedMay 8, 2021 increased by$253.3 million to$596.2 million from$342.9 million in the comparable prior year period, and diluted earnings per share increased by 84.0% to$26.48 from$14.39 . 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$1.77 .
Thirty-Six Weeks Ended
Compared with Thirty-Six Weeks Ended
Net sales for the thirty-six weeks endedMay 8, 2021 increased$1.630 million to$9.716 billion , or 20.2%, over net sales of$8.086 billion for the comparable prior year period. Total auto parts sales increased by 20.4%, primarily driven by an increase in domestic same store sales of 19.0% and net sales of$133.4 million from new stores. Domestic commercial sales increased by$410.6 million , or 23.4%, to$2.163 billion .
Gross profit for the thirty-six weeks endedMay 8, 2021 was$5.150 billion , or 53.0% of net sales, compared with$4.358 billion , or 53.9% of net sales, during the comparable prior year period. The decrease in gross margin was primarily driven by the accelerated growth in our Commercial business and our investment in pricing initiatives. 19 Table of Contents
Operating, selling, general and administrative expenses for the thirty-six weeks endedMay 8, 2021 were$3.249 billion , or 33.4% of net sales, compared with$2.958 billion , or 36.6% of net sales, during the comparable prior year period. The decrease in operating expenses, as a percentage of sales, was primarily driven by strong sales growth. Total pandemic related expenses, including ETO were approximately$46 million for the thirty-six week period endedMay 8, 2021 compared to approximately$75 million during the comparable prior year period. Net interest expense for the thirty-six weeks endedMay 8, 2021 was$137.2 million compared with$135.5 million during the comparable prior year period. The increase was primarily due to an increase in the weighted average borrowing rate. Average borrowings for the thirty-six weeks endedMay 8, 2021 were$5.460 billion , compared with$5.371 billion for the comparable prior year period. Weighted average borrowing rates were 3.3% and 3.2% for the thirty-six week periods endedMay 8, 2021 andMay 9, 2020 , respectively. Our effective income tax rate was 21.5% of pretax income for the thirty-six weeks endedMay 8, 2021 , which was flat to the comparable prior year period. The benefit of stock options exercised for the thirty-six week period endedMay 8, 2021 was$35.2 million compared to$17.6 million in the comparable prior year period. Net income for the thirty-six week period endedMay 8, 2021 increased by$392.0 million to$1.385 billion due to the factors set forth above, and diluted earnings per share increased by 45.6% to$59.80 from$41.08 in the comparable prior year period. The impact on current year to date diluted earnings per share from stock repurchases since the end of the comparable prior year period resulted in an increase of$2.18 per share.
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 thirty-six weeks endedMay 8, 2021 , our net cash flows from operating activities provided$2.230 billion compared with$1.303 billion provided during the comparable prior year period. The increase is primarily due to favorable changes in accounts payable and growth in net income due to accelerated sales growth as a result of the effect of the COVID-19 pandemic on our customers. Our net cash flows used in investing activities for the thirty-six weeks endedMay 8, 2021 were$358.7 million as compared with$247.9 million in the comparable prior year period. Capital expenditures for the thirty-six weeks endedMay 8, 2021 were$375.7 million compared to$273.9 million . The increase is primarily driven by increased store openings. During the thirty-six week period endedMay 8, 2021 andMay 9, 2020 , we opened 108 and 73 net new stores, respectively. Investing cash flows were impacted by our wholly owned captive, which purchased$52.6 million and sold$72.3 million in marketable debt securities during the thirty-six weeks endedMay 8, 2021 . During the comparable prior year period, the captive purchased$82.5 million in marketable debt securities and sold$106.7 million . Our net cash flows used in financing activities for the thirty-six weeks endedMay 8, 2021 were$2.651 billion compared to$712.2 million in the comparable prior year period. During the thirty-six weeks endedMay 8, 2021 , we repaid our$250 million 2.500% Senior Notes dueApril 2021 , which were callable at par inMarch 2021 . In the comparable prior year period, we received$500 million from the issuance of 3.625% Senior Notes dueApril 2025 and received$750 million from the issuance of 4.000% Senior Notes dueApril 2030 . We did not have any commercial paper activity during the thirty-six week period endedMay 8, 2021 as compared to$1.030 billion in net proceeds in the comparable prior year period. Stock repurchases were$2.478 billion in the current thirty-six week period as compared with$930.9 million in the prior year period. Proceeds from the sale of common stock and exercises of stock options for the thirty-six weeks endedMay 8, 2021 andMay 9, 2020 provided$121.9 million and$56.3 million , respectively. During fiscal 2021, we expect to increase the investment in our business as compared to fiscal 2020. The expected increase is driven by delays in capital spending for the third and fourth quarter of fiscal 2020 related to the uncertainties surrounding the COVID-19 pandemic. Our investments continue to be directed primarily to new stores, supply chain infrastructure, technology 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 theU.S. ,Mexico orBrazil , 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 arrangements with financial institutions whereby they factor their AutoZone receivables, allowing them to receive early payment from the financial institution on our invoices at a discounted rate. The terms of these agreements are between the vendor and the financial institution. Upon request from the vendor, we confirm to the vendor's financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances. A downgrade in our credit or changes in the financial markets may limit the financial institutions' willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms. A reduction in payment terms would increase the working capital required to fund future inventory investments. Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio. Accounts payable, as a percentage of gross inventory, was 123.9% atMay 8, 2021 , compared to 108.2% atMay 9, 2020 . The increase from the comparable prior year period was primarily due to increased accounts payable purchases with favorable vendor terms and higher inventory turns. 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 based on our current credit ratings and favorable experiences in the debt markets in
the past. For the trailing four quarters endedMay 8, 2021 , our adjusted after-tax return on invested capital ("ROIC"), which is a non-GAAP measure, was 40.2% as compared to 34.0% 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
On
As ofMay 8, 2021 , the$500 million 3.700% Senior Notes dueApril 2022 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 ofMay 8, 2021 , we had$1.998 billion of availability under our$2.0 billion Revolving Credit Agreement. 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) 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 ; (iii) the termination date of the Revolving Credit Agreement was extended fromNovember 18, 2021 untilNovember 18, 2022 ; and (iv) 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
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Under our Revolving Credit Agreement, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances.
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 ofMay 8, 2021 , we had$25.0 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
OnApril 3, 2020 , we entered into a 364-Day Credit Agreement (the "364-Day Credit Agreement") to supplement our existing Revolving Credit Agreement. The 364-Day Credit Agreement provided for loans in the aggregate principal amount of up to$750 million . The 364-Day Credit Agreement had a termination date of, and any amounts borrowed under the 364-Day Credit Agreement were due and payable on,April 2, 2021 . Revolving loans under the 364-Day Credit Agreement could be base rate loans, Eurodollar loans, or a combination of both, at our election. EffectiveFebruary 22, 2021 , we terminated the 364-Day Credit Agreement. There were no borrowings outstanding under the 364-Day Credit Agreement. We entered into the 364-Day Credit Agreement to augment our access to liquidity due to macroeconomic conditions existing at the time, and we determined the additional access to liquidity was no longer necessary. All Senior Notes are subject to an interest rate adjustment if the debt ratings assigned are downgraded (as defined in the agreements). Further, the Senior Notes contain a provision that repayment 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, sale and leaseback transactions and consolidations, mergers and the sale of assets. 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 ofMay 8, 2021 , we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements. Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense ("EBITDAR") ratio was 2.0:1 as ofMay 8, 2021 and was 2.6:1 as ofMay 9, 2020 . We calculate adjusted debt as the sum of total debt, financing lease liabilities and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent, and share-based compensation expense 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. Stock Repurchases
From
OnDecember 15, 2020 , the Board voted to increase the repurchase authorization by$1.5 billion . OnMarch 23, 2021 , the Board voted to increase the repurchase authorization by an additional$1.5 billion . This raised the total value of shares authorized to be repurchased to$26.15 billion . Considering cumulative repurchases as ofMay 8, 2021 , we had$1.318 billion remaining under the Board's authorization to repurchase our common stock. 22
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Subsequent to
Off-Balance Sheet Arrangements
Since our fiscal year end, we have canceled, issued and modified stand-by letters of credit that are primarily renewed on an annual basis to cover deductible payments to our casualty insurance carriers. Our total stand-by letters of credit commitment atMay 8, 2021 , was$163.5 million , compared with$246.9 million atAugust 29, 2020 , and our total surety bonds commitment atMay 8, 2021 , was$41.9 million , compared with$56.7 million atAugust 29, 2020 .
Financial Commitments
Except for the previously discussed termination of the 364-Day Credit Agreement and the repayment of the$250 million 2.500% Senior Notes dueApril 2021 , as ofMay 8, 2021 , there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year endedAugust 29, 2020 .
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 optimal 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 as it indicates more clearly our
comparative year-to-year operating results. Furthermore, our management and the
Compensation Committee of the Board use these non-GAAP financial measures to
analyze and compare our underlying operating results and use select measurements
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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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
A B A-B=C D C+D
Fiscal Year Thirty-Six Sixteen Thirty-Six Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 29, May 9, August 29, May 8, May 8,
(in thousands, except
percentage) 2020(1) 2020 2020 2021 2021
Net income $ 1,732,972 $ 992,515 $ 740,457 $ 1,384,543 $ 2,125,000
Adjustments:
Interest expense 201,165 135,528 65,637 137,217 202,854
Rent expense(2) 329,783 227,327 102,456 236,737 339,193
Tax effect(3) (115,747) (79,102) (36,645) (81,522) (118,167)
Adjusted after-tax return $ 2,148,173 $ 1,276,268 $ 871,905 $ 1,676,975 $ 2,548,880
Average debt(4) $ 5,446,162
Average stockholders'
deficit(4) (1,364,932)
Add: Rent x 6(2) 2,035,158
Average finance lease
liabilities(4) 227,061
Invested capital $ 6,343,449
Adjusted after-tax ROIC 40.2 %
A B A-B=C D C+D
Fiscal Year Thirty-Six Seventeen Thirty-Six Trailing Four
Ended Weeks Ended Weeks Ended Weeks Ended Quarters Ended
August 31, May 4, August 31, May 9, May 9,
(in thousands, except
percentage) 2019(1) 2019 2019 2020 2020
Net income $ 1,617,221 $ 1,051,992 $ 565,229 $ 992,515 $ 1,557,744
Adjustments:
Interest expense 184,804 123,608 61,196 135,528 196,724
Rent expense(2) 332,726 224,259 108,467 227,327 335,794
Tax effect(3) (111,269) (74,791) (36,478) (78,014) (114,492)
Deferred tax liabilities, net
of repatriation tax (6,340) (6,340) - - -
Adjusted after-tax return $ 2,017,142 $ 1,318,728 $ 698,414 $ 1,277,356 $ 1,975,770
Average debt(4) $ 5,303,066
Average stockholders'
deficit(4) (1,684,662)
Add: Rent x 6(2) 2,014,764
Average finance lease
liabilities(4) 184,286
Invested capital $ 5,817,454
Adjusted after-tax ROIC 34.0 %
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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
A B A-B=C D C+D
Fiscal Year Thirty-Six Sixteen Thirty-Six Trailing Four
Ended Weeks Ended WeeksEnded Weeks Ended Quarters Ended
August 29, May 9, August 29, May 8, May 8,
(in thousands, except ratio) 2020(1) 2020 2020 2021 2021
Net income $ 1,732,972 $ 992,515 $ 740,457 $ 1,384,543 $ 2,125,000
Add: Interest expense 201,165 135,528 65,637 137,217 202,854
Income tax expense 483,542 271,591 211,951 378,737 590,688
Adjusted EBIT 2,417,679 1,399,634 1,018,045 1,900,497 2,918,542
Add: Depreciation and
amortization expense 397,466 272,115 125,351 278,044 403,395
Rent expense(2) 329,783 227,327 102,456 236,737 339,193
Share-based expense 44,835 32,251 12,584 38,061 50,645
Adjusted EBITDAR $ 3,189,763 $ 1,931,327 $ 1,258,436 $ 2,453,339 $ 3,711,775
Debt $ 5,267,896 Financing lease liabilities
228,597
Add: Rent x 6(2) 2,035,158
Adjusted debt $ 7,531,651 Adjusted debt to EBITDAR
2.0
A B A-B=C D C+D
Fiscal Year Thirty-Six Seventeen Thirty-Six Trailing Four
Ended Weeks Ended WeeksEnded Weeks Ended Quarters Ended
August 31, May 4, August 31, May 9, May 9,
(in thousands, except ratio) 2019(1) 2019 2019 2020 2020
Net income $ 1,617,221 $ 1,051,992 $ 565,229 $ 992,515 $ 1,557,744
Add: Interest expense 184,804 123,608 61,196 135,528 196,724
Income tax expense 414,112 259,762 154,350 271,591 425,941
Adjusted EBIT 2,216,137 1,435,362 780,775 1,399,634 2,180,409
Add: Depreciation and
amortization expense 369,957 251,118 118,839 272,115 390,954
Rent expense(2) 332,726 224,259 108,467 227,327 335,794
Share-based expense 43,255 31,529 11,726 32,251 43,977
Adjusted EBITDAR $ 2,962,075 $ 1,942,268 $ 1,019,807 $ 1,931,327 $ 2,951,134
Debt $ 5,418,272 Financing lease liabilities
184,276
Add: Rent x 6(2) 2,014,764
Adjusted debt $ 7,617,312 Adjusted debt to EBITDAR
2.6
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(1) The fiscal year ended
presented fiscal years are based on 52 weeks.
The table below outlines the calculation of rent expense and reconciles rent (2) expense to total lease cost, per ASC 842, the most directly comparable GAAP
financial measure, for the trailing four quarters ended
9, 2020 (in thousands):
Total lease cost, per ASC 842, for the trailing four
quarters ended
$ 421,750
Less: Finance lease interest and amortization
(55,725)
Less: Variable operating lease components, related to insurance and common area maintenance
(26,832)
Rent expense for the trailing four quarters ended
$ 339,193
Total lease cost, per ASC 842, for the 36 weeks ended
$ 286,626
Less: Finance lease interest and amortization
(42,172)
Less: Variable operating lease components, related to insurance and common area maintenance
(17,127)
Rent expense for the 36 weeks endedMay 9, 2020 $
227,327
Add: Rent expense for the 17 weeks ended
108,467
Rent expense for the trailing four quarters ended May 9, 2020 $ 335,794
(3) Effective tax rate over trailing four quarters ended
2020 is 21.8% and 21.5%, respectively.
(4) All averages are computed based on trailing five quarter balances.
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
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 29, 2020 . There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year endedAugust 29, 2020 .
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