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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 18, 2023, or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to ________.

Commission file number 1-10714

Graphic

AUTOZONE, INC.

(Exact name of registrant as specified in its charter)

Nevada

62-1482048

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

123 South Front Street, Memphis, Tennessee

38103

(Address of principal executive offices)

(Zip Code)

(901) 495-6500

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

   

Trading Symbol(s)

   

Name of Each Exchange on which Registered

Common Stock ($0.01 par value)

AZO

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 Par Value – 17,291,904 shares outstanding as of December 11, 2023.

Table of Contents

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

CONDENSED CONSOLIDATED BALANCE SHEETS

3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

4

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

5

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

16

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

PART II.

OTHER INFORMATION

25

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

26

SIGNATURES

28

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements.

AUTOZONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

November 18,

August 26,

(in thousands)

2023

2023

Assets

 

  

Current assets:

 

  

Cash and cash equivalents

$

282,981

$

277,054

Accounts receivable

 

511,907

 

520,385

Merchandise inventories

 

5,774,467

 

5,764,143

Other current assets

 

387,446

 

217,844

Total current assets

 

6,956,801

 

6,779,426

Property and equipment:

Property and equipment

 

10,550,192

 

10,337,890

Less: Accumulated depreciation and amortization

 

(4,837,035)

 

(4,741,342)

 

5,713,157

 

5,596,548

Operating lease right-of-use assets

2,998,672

2,998,097

Goodwill

 

302,645

 

302,645

Deferred income taxes

 

84,087

 

86,002

Other long-term assets

 

237,208

 

223,160

Total long-term assets

 

3,622,612

 

3,609,904

Total assets

$

16,292,570

$

15,985,878

Liabilities and Stockholders’ Deficit

Current liabilities:

Accounts payable

$

7,182,948

$

7,201,281

Current portion of operating lease liabilities

288,854

257,256

Accrued expenses and other

 

1,202,508

 

1,000,841

Income taxes payable

 

111,312

 

52,478

Total current liabilities

 

8,785,622

 

8,511,856

Long-term debt

 

8,583,523

 

7,668,549

Operating lease liabilities, less current portion

2,910,727

2,917,046

Deferred income taxes

 

534,472

 

536,278

Other long-term liabilities

 

691,897

 

702,043

Commitments and contingencies

Stockholders’ deficit:

Preferred stock, authorized 1,000 shares; no shares issued

 

 

Common stock, par value $.01 per share, authorized 200,000 shares; 18,984 shares issued and 17,326 shares outstanding as of November 18, 2023; 18,936 shares issued and 17,857 shares outstanding as of August 26, 2023

 

190

 

189

Additional paid-in capital

 

1,548,510

 

1,484,992

Retained deficit

 

(2,365,815)

 

(2,959,278)

Accumulated other comprehensive loss

 

(210,359)

 

(190,836)

Treasury stock, at cost

 

(4,186,197)

 

(2,684,961)

Total stockholders’ deficit

 

(5,213,671)

 

(4,349,894)

Total liabilities and stockholders' deficit

$

16,292,570

$

15,985,878

See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Twelve Weeks Ended

November 18,

November 19,

(in thousands, except per share data)

2023

2022

Net sales

    

$

4,190,277

    

$

3,985,067

Cost of sales, including warehouse and delivery expenses

1,976,261

1,990,445

Gross profit

2,214,016

 

1,994,622

Operating, selling, general and administrative expenses

1,365,412

1,271,589

Operating profit

848,604

723,033

Interest expense, net

91,384

57,723

Income before income taxes

757,220

 

665,310

Income tax expense

163,757

125,992

Net income

$

593,463

$

539,318

Weighted average shares for basic earnings per share

 

17,709

 

19,007

Effect of dilutive stock equivalents

525

638

Weighted average shares for diluted earnings per share

 

18,234

 

19,645

Basic earnings per share

$

33.51

$

28.37

Diluted earnings per share

$

32.55

$

27.45

See Notes to Condensed Consolidated Financial Statements.

AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Twelve Weeks Ended

    

November 18,

    

November 19,

(in thousands)

2023

2022

Net income

$

593,463

$

539,318

Other comprehensive income:

 

 

  

Foreign currency translation adjustments

 

(20,221)

 

3,335

Unrealized gains (losses) on marketable debt securities, net of taxes

 

295

 

(671)

Net derivative activities, net of taxes

 

403

 

607

Total other comprehensive (loss) income

 

(19,523)

 

3,271

Comprehensive income

$

573,940

$

542,589

See Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Twelve Weeks Ended

    

November 18,

November 19,

(in thousands)

2023

2022

Cash flows from operating activities:

 

 

  

Net income

$

593,463

$

539,318

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Depreciation and amortization of property and equipment

 

120,224

 

109,253

Other non-cash (income) charges

 

(2,000)

 

81,000

Amortization of debt origination fees

 

2,810

 

1,905

Deferred income taxes

 

882

 

13,816

Share-based compensation expense

 

22,913

 

19,005

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

6,856

 

4,100

Merchandise inventories

 

(21,899)

 

(39,308)

Accounts payable and accrued expenses

 

33,762

 

6,574

Income taxes

 

96,793

 

73,954

Other, net

 

(23,545)

 

(16,030)

Net cash provided by operating activities

 

830,259

 

793,587

Cash flows from investing activities:

 

 

  

Capital expenditures

 

(235,428)

 

(114,397)

Purchase of marketable debt securities

 

(4,115)

 

(11,989)

Proceeds from sale of marketable debt securities

 

1,944

 

4,893

Investment in tax credit equity investments

(41,150)

(2,474)

Proceeds from disposal of capital assets and other, net

 

8,235

 

10,080

Net cash used in investing activities

 

(270,514)

 

(113,887)

Cash flows from financing activities:

 

 

  

Net (payments of) proceeds from commercial paper

 

(76,900)

 

204,900

Proceeds from issuance of debt

 

1,000,000

 

Net proceeds from sale of common stock

 

41,448

 

40,828

Purchase of treasury stock

(1,486,876)

(899,998)

Repayment of principal portion of finance lease liabilities

 

(20,202)

(20,598)

Other, net

 

(9,696)

 

(783)

Net cash used in financing activities

 

(552,226)

 

(675,651)

Effect of exchange rate changes on cash

 

(1,592)

 

1,361

Net increase in cash and cash equivalents

 

5,927

 

5,410

Cash and cash equivalents at beginning of period

 

277,054

 

264,380

Cash and cash equivalents at end of period

$

282,981

$

269,790

See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

AUTOZONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

Twelve Weeks Ended November 18, 2023

Accumulated

Common

Additional

Other

    

Shares

    

Common

    

Paid-in

    

Retained

    

Comprehensive

    

Treasury

    

(in thousands)

Issued

Stock

Capital

Deficit

Loss

Stock

Total

Balance at August 26, 2023

 

18,936

$

189

$

1,484,992

$

(2,959,278)

$

(190,836)

$

(2,684,961)

$

(4,349,894)

Net income

 

 

 

 

593,463

 

 

 

593,463

Total other comprehensive income

 

 

 

 

 

(19,523)

 

 

(19,523)

Purchase of 580 shares of treasury stock(1)

 

 

 

 

 

 

(1,501,236)

 

(1,501,236)

Issuance of common stock under stock options and stock purchase plans

 

48

 

1

 

41,447

 

 

 

 

41,448

Share-based compensation expense

 

 

 

22,071

 

 

 

 

22,071

Balance at November 18, 2023

 

18,984

$

190

$

1,548,510

$

(2,365,815)

$

(210,359)

$

(4,186,197)

$

(5,213,671)

Twelve Weeks Ended November 19, 2022

Accumulated

Common

Additional

Other

    

Shares

    

Common

    

Paid-in

    

Retained

    

Comprehensive

    

Treasury

    

(in thousands)

Issued

Stock

Capital

Deficit

Loss

Stock

Total

Balance at August 27, 2022

 

20,732

$

207

$

1,354,252

$

(1,330,067)

$

(300,536)

$

(3,262,769)

$

(3,538,913)

Net income

 

 

 

 

539,318

 

 

 

539,318

Total other comprehensive income

 

 

 

 

 

3,271

 

 

3,271

Purchase of 392 shares of treasury stock

 

 

 

 

 

 

(899,998)

 

(899,998)

Issuance of common stock under stock options and stock purchase plans

 

62

 

1

 

40,828

 

40,829

Share-based compensation expense

 

 

 

17,570

 

 

 

 

17,570

Balance at November 19, 2022

 

20,794

$

208

$

1,412,650

$

(790,749)

$

(297,265)

$

(4,162,767)

$

(3,837,923)

(1)Inclusive of excise tax of $14.4 million for the quarter ended November 18, 2023. The excise tax is assessed at one percent of the fair value of net stock repurchases after December 31, 2022.

See Notes to Condensed Consolidated Financial Statements.

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AUTOZONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A – General

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission’s (the “SEC”) rules and regulations. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and related notes included in the AutoZone, Inc. (“AutoZone” or the “Company”) Annual Report on Form 10-K for the year ended August 26, 2023.

Operating results for the twelve weeks ended November 18, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2024. Each of the first three quarters of AutoZone’s fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarter of fiscal 2024 has 17 weeks, and the fourth quarter of fiscal 2023 had 16 weeks.

Recently Adopted Accounting Pronouncements

In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50). This ASU requires buyers in a supplier finance program to disclose sufficient qualitative and quantitative information about the program to allow a reader of the financial statements to understand the program’s nature, activity during the period, changes from period to period and the program’s potential magnitude. This ASU is effective for all companies for fiscal years beginning after December 15, 2022, including interim periods within those years, and requires retrospective adoption. The Company adopted the required disclosures of this standard on a retrospective basis beginning with its first quarter ending November 18, 2023. The adoption of ASU 2022-04 did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures. Refer to “Note F – Supplier Financing Programs.”

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (CODM), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. This ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss. Public entities will be required to provide all annual disclosures currently required by Topic 280 in interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments in the update and existing segment disclosures in Topic 280. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. Early adoption is permitted. The Company will adopt this standard beginning with our fiscal year ending August 30, 2025. The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact.

R

Note B – Merchandise Inventories

Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method stated at the lower of cost or net realizable value for domestic inventories and the weighted average cost method stated at the lower of cost or net realizable value for Mexico and Brazil inventories. The Company’s policy is not to write up inventory in excess of replacement cost. Due to price inflation on the Company’s merchandise purchases, primarily driven by increased freight costs, the Company’s LIFO credit reserve

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balance was $57.0 million at November 18, 2023, and $59.0 million at August 26, 2023. Increases to the Company’s LIFO credit reserve balance are recorded as a non-cash charge to cost of sales and decreases are recorded as a non-cash benefit to cost of sales.

Note C – Variable Interest Entities

The Company invests in certain tax credit funds that promote renewable energy and generate a return primarily through the realization of federal tax credits. The Company considers its investment in these tax credit funds as an investment in a variable interest entity (“VIE”). The Company evaluates the investment in any VIE to determine whether it is the primary beneficiary. The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. As of November 18, 2023, the Company held tax credit equity investments that were deemed to be VIE’s and determined that it was not the primary beneficiary of the entities, as it did not have the power to direct the activities that most significantly impacted the entity and accounted for this investment using the equity method. The Company’s maximum exposure to losses is generally limited to its net investment, which was $23.8 million as of November 18, 2023.

Note D – Fair Value Measurements

The Company defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company uses the fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are set forth below:

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 inputs—inputs other than quoted market prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability.

Level 3 inputs—unobservable inputs for the asset or liability, which are based on the Company’s own assumptions as there is little, if any, observable activity in identical assets or liabilities.

Marketable Debt Securities Measured at Fair Value on a Recurring Basis

The Company’s marketable debt securities measured at fair value on a recurring basis were as follows:

November 18, 2023

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Other current assets

$

46,696

$

3,741

$

$

50,437

Other long-term assets

 

63,519

10,099

 

 

73,618

$

110,215

$

13,840

$

$

124,055

August 26, 2023

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Fair Value

Other current assets

$

35,349

$

4,290

$

$

39,639

Other long-term assets

 

71,028

 

10,846

 

 

81,874

$

106,377

$

15,136

$

$

121,513

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At November 18, 2023, the fair value measurement amounts for assets and liabilities recorded in the accompanying Condensed Consolidated Balance Sheets consisted of short-term marketable debt securities, which are included within Other current assets, and long-term marketable debt securities, which are included in Other long-term assets. The Company’s marketable debt securities are typically valued at the closing price in the principal active market as of the last business day of the quarter or through the use of other market inputs relating to the securities, including benchmark yields and reported trades. The fair values of the marketable debt securities, by asset class, are described in “Note E – Marketable Debt Securities.”

Financial Instruments not Recognized at Fair Value

The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in “Note H – Financing.”

Note E – Marketable Debt Securities

Marketable debt securities are carried at fair value, with unrealized gains and losses, net of income taxes, recorded in Accumulated other comprehensive loss until realized, and any credit risk related losses are recognized in net income in the period incurred. The Company’s basis for determining the cost of a security sold is the “Specific Identification Model.”

The Company’s available-for-sale marketable debt securities consisted of the following:

November 18, 2023

    

Amortized

    

Gross

    

Gross

    

Cost

Unrealized

Unrealized

Fair

(in thousands)

Basis

Gains

Losses

Value

Corporate debt securities

$

30,998

$

$

(477)

$

30,521

Government bonds

 

63,885

 

475

 

(1,655)

 

62,705

Mortgage-backed securities

 

2,838

 

 

(151)

 

2,687

Asset-backed securities and other

 

28,334

 

 

(192)

 

28,142

$

126,055

$

475

$

(2,475)

$

124,055

August 26, 2023

    

Amortized

    

Gross

    

Gross

    

Cost

Unrealized

Unrealized

Fair

(in thousands)

Basis

Gains

Losses

Value

Corporate debt securities

$

31,683

$

17

$

(504)

$

31,196

Government bonds

 

63,747

 

 

(1,440)

 

62,307

Mortgage-backed securities

 

3,215

 

 

(213)

 

3,002

Asset-backed securities and other

 

25,242

 

 

(234)

 

25,008

$

123,887

$

17

$

(2,391)

$

121,513

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The marketable debt securities held at November 18, 2023, had effective maturities ranging from less than one year to approximately twelve years. At November 18, 2023, the Company held 73 securities that are in an unrealized loss position of approximately $2.5 million. In evaluating whether a credit loss exists for the securities, the Company considers factors such as the severity of the loss position, the credit worthiness of the investee, the term to maturity and the intent and ability to hold the investments until maturity or until recovery of fair value. An allowance for credit losses was deemed unnecessary given consideration of the factors above. The Company did not realize any material gains or losses on its marketable debt securities during the twelve week period ended November 18, 2023 and the comparable prior year period.

Included above in total available-for-sale marketable debt securities are $106.4 million of marketable debt securities transferred by the Company’s insurance captive to a trust account to secure its obligations to an insurance company related to future workers’ compensation and casualty losses.

Note F – Supplier Financing Programs

The Company has arrangements with third-party financial institutions to confirm invoice balances owed by the Company to certain suppliers and pay the financial institutions the confirmed amounts on the invoice due dates. These arrangements allow the Company’s inventory suppliers, at their sole discretion, to enter into agreements directly with these financial institutions to finance the Company’s obligations to the suppliers at terms negotiated between the suppliers and the financial institutions. Supplier participation is optional and our obligations to our suppliers, including the amount and dates due, are not impacted by our suppliers’ decision to enter into an agreement with a third-party financial institution. As of November 18, 2023 and August 26, 2023, the Company had supplier obligations outstanding that had been confirmed under these arrangements of $4.8 billion for each period, which are included in Accounts payable and $209.6 million and $224.8 million, respectively, which are included in Other long-term liabilities in the Condensed Consolidated Balance Sheets.

Note G – Litigation

The Company is involved in various legal proceedings incidental to the conduct of its business, including, but not limited to, claims and allegations related to wage and hour violations, unlawful termination, employment practices, product liability, privacy and cybersecurity, environmental matters, intellectual property rights or regulatory compliance. The Company does not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Company’s financial condition, results of operations or cash flows.

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Note H – Financing

The Company’s debt consisted of the following:

    

November 18,

    

August 26,

(in thousands)

2023

2023

3.125% Senior Notes due April 2024, effective interest rate 3.32%

$

300,000

$

300,000

3.250% Senior Notes due April 2025, effective interest rate 3.36%

 

400,000

 

400,000

3.625% Senior Notes due April 2025, effective interest rate 3.78%

500,000

500,000

3.125% Senior Notes due April 2026, effective interest rate 3.28%

 

400,000

 

400,000

5.050% Senior Notes due July 2026, effective interest rate 5.09%

450,000

450,000

3.750% Senior Notes due June 2027, effective interest rate 3.83%

 

600,000

 

600,000

4.500% Senior Notes due February 2028, effective interest rate 4.43%

450,000

450,000

6.250% Senior Notes due November 2028, effective interest rate 6.46%

500,000

3.750% Senior Notes due April 2029, effective interest rate 3.86%

 

450,000

 

450,000

4.000% Senior Notes due April 2030, effective interest rate 4.09%

750,000

750,000

1.650% Senior Notes due January 2031, effective interest rate 2.19%

600,000

600,000

4.750% Senior Notes due August 2032, effective interest rate 4.76%

750,000

750,000

4.750% Senior Notes due February 2033, effective interest rate 4.70%

550,000

550,000

5.200% Senior Notes due August 2033, effective interest rate 5.22%

300,000

300,000

6.550% Senior Notes due November 2033, effective interest rate 6.71%

500,000

Commercial paper, weighted average interest rate 5.43% at November 18, 2023 and August 26, 2023

 

1,132,700

 

1,209,600

Total debt before discounts and debt issuance costs

 

8,632,700

 

7,709,600

Less: Discounts and debt issuance costs

49,177

 

41,051

Long-term Debt

$

8,583,523

$

7,668,549

On November 15, 2021, the Company amended and restated its existing revolving credit facility (as amended from time to time, the “Revolving Credit Agreement”) pursuant to which the Company’s borrowing capacity was increased from $2.0 billion to $2.25 billion, and the maximum borrowing under the Revolving Credit Agreement may, at the Company’s option, subject to lenders’ approval, be increased from $2.25 billion to $3.25 billion. On November 15, 2022, the Company amended the Revolving Credit Agreement, extending the termination date by one year. As amended, the Revolving Credit Agreement will terminate, and all amounts borrowed will be due and payable on November 15, 2027, but AutoZone may make one additional request to extend the termination date for an additional period of one year. Revolving borrowings under the Revolving Credit Agreement may be base rate loans, Term Secured Overnight Financing Rate (“SOFR”) loans, or a combination of both, at AutoZone’s election. The Revolving Credit Agreement includes (i) a $75 million sublimit for swingline loans, (ii) a $50 million individual issuer letter of credit sublimit and (iii) a $250 million aggregate sublimit for all letters of credit.

Under the Company’s Revolving Credit Agreement, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances.

As of November 18, 2023, the Company had no outstanding borrowings and $1.8 million of outstanding letters of credit under the Revolving Credit Agreement.

The Company also maintains a letter of credit facility that allows it to request the participating bank to issue letters of credit on its 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 18, 2023, the Company had $25.0 million in letters of credit outstanding under the letter of credit facility, which expires in June 2025.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, the Company had $120.5 million in letters of credit outstanding as of November 18, 2023. These letters of credit have various maturity dates and were issued on an uncommitted basis.

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As of November 18, 2023, the $1.1 billion commercial paper borrowings and the $300 million 3.125% Senior Notes due April 2024 were classified as long-term in the accompanying Consolidated Balance Sheets as the Company currently has the ability and intent to refinance them on a long-term basis through available capacity under its Revolving Credit Agreement. As of November 18, 2023, the Company had $2.2 billion of availability under its Revolving Credit Agreement, without giving effect to commercial paper borrowings, which would allow it to replace these short-term obligations with a long-term financing facility.

On October 25, 2023, the Company issued $500 million in 6.250% Senior Notes due November 2028 and $500 million in 6.550% Senior Notes due November 2033. Proceeds from the debt issuances were used for general corporate purposes.

The Senior Notes contain a provision that repayment may be accelerated if the Company experiences a change of control (as defined in the agreements). The Company’s borrowings under its Senior Notes contain minimal covenants, primarily restrictions on liens. All of the repayment obligations under its borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs. Interest for the Senior Notes is paid on a semi-annual basis.

The fair value of the Company’s debt was estimated at $8.2 billion as of November 18, 2023, and $7.3 billion as of August 26, 2023, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same terms (Level 2). Such fair value is less than the carrying value of debt by $372.0 million and $406.6 million at November 18, 2023 and August 26, 2023, respectively, which reflects their face amount, adjusted for any unamortized debt issuance costs and discounts.

As of November 18, 2023, the Company was in compliance with all covenants and expects to remain in compliance with all covenants under its borrowing arrangements.

Note I – Stock Repurchase Program

From January 1, 1998 to November 18, 2023, the Company has repurchased a total of 154.6 million shares of its common stock at an aggregate cost of $35.3 billion, including 579.7 thousand shares of its common stock at an aggregate cost of $1.5 billion (inclusive of excise tax of $14.4 million) during the twelve week period ended November 18, 2023. The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 2022.

On June 14, 2023, the Board voted to authorize the repurchase of an additional $2.0 billion of the Company’s common stock in connection with its ongoing share repurchase program, which raised the total value of shares authorized to be repurchased to $35.7 billion. Considering the cumulative repurchases as of November 18, 2023, the Company had $333.1 million remaining under the Board’s authorization to repurchase its common stock.

Subsequent to November 18, 2023 and through December 11, 2023, the Company has repurchased 40.1 thousand shares of its common stock at an aggregate cost of $106.0 million.

Note J – Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss includes foreign currency translation adjustments, activity for interest rate swaps and treasury rate locks that qualified as cash flow hedges and unrealized gains (losses) on available-for-sale marketable debt securities.

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Changes in Accumulated other comprehensive loss for the twelve week periods ended November 18, 2023 and November 19, 2022 consisted of the following:

Net

Foreign

Unrealized

Currency

Gain (Loss)

(in thousands)

   

and Other(1)

   

on Securities

Derivatives

Total

Balance at August 26, 2023

$

(176,557)

$

(1,851)

$

(12,428)

$

(190,836)

Other comprehensive income (loss) before reclassifications(2)(3)

 

(20,221)

295

 

 

(19,926)

Amounts reclassified from Accumulated other comprehensive loss(3)

 

 

 

403

 

403

Balance at November 18, 2023

$

(196,778)

$

(1,556)

$

(12,025)

$

(210,359)

Net

Foreign

Unrealized

Currency

Gain (Loss)

(in thousands)

   

 and Other(1)

   

on Securities

Derivatives

Total

Balance at August 27, 2022

$

(280,190)

$

(2,171)

$

(18,175)

$

(300,536)

Other comprehensive income (loss) before reclassifications(2)(3)

 

3,335

 

(671)

 

 

2,664

Amounts reclassified from Accumulated other comprehensive loss(3)

 

 

 

607

 

607

Balance at November 19, 2022

$

(276,855)

$

(2,842)

$

(17,568)

$

(297,265)

(1)Foreign currency is shown net of U.S. tax to account for foreign currency impacts of certain undistributed non-U.S. subsidiaries’ earnings. Other foreign currency is not shown net of additional U.S. tax as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested.
(2)Amounts in parentheses indicate debits to Accumulated Other Comprehensive Loss.
(3)Amounts shown are net of tax.

Note K – Share-Based Payments

AutoZone maintains several equity incentive plans, which provide equity-based compensation to non-employee directors and eligible employees for their service to AutoZone, its subsidiaries or affiliates. The Company recognizes compensation expense for share-based payments based on the fair value of the awards at the grant date. Share-based payments include stock option grants, restricted stock grants, restricted stock unit grants, stock appreciation rights, discounts on shares sold to employees under share purchase plans and other awards. Additionally, directors’ fees are paid in restricted stock units with value equivalent to the value of shares of common stock as of the grant date. The change in fair value of liability-based stock awards is also recognized in share-based compensation expense.

Stock Options:

The Company made stock option grants for 130,723 shares during the twelve week period ended November 18, 2023 and granted options to purchase 157,113 shares during the comparable prior year period. The Company grants options to purchase common stock to certain of its employees under its equity incentive plans at prices equal to or above the market value of the stock on the date of grant. Option-vesting periods range from four to five years, with the vast majority of options vesting ratably over four years. The fair value of each option is amortized into compensation expense on a straight-line basis over the requisite service period, less estimated forfeitures. Beginning with grants made in fiscal 2024, employees who meet the qualified retirement provisions under the AutoZone, Inc. 2020 Omnibus Incentive Award Plan are assumed to have a 0% forfeiture rate. All other employee grants assume a 10% forfeiture rate, which is based on historical experience.

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The weighted average fair value of the stock option awards granted during the twelve week period ended November 18, 2023 and November 19, 2022, using the Black-Scholes-Merton multiple-option pricing valuation model, was $913.31 and $760.82 per share, respectively, using the following weighted average key assumptions:

Twelve Weeks Ended

    

November 18,

    

November 19,

    

    

2023

2022

Expected price volatility

 

29

%  

29

%

Risk-free interest rate

 

4.8

%  

3.8

%

Weighted average expected lives (in years)

 

5.4

 

5.4

 

Forfeiture rate

 

7

%  

10

%

Dividend yield

 

0

%  

0

%

During the twelve week period ended November 18, 2023, and the comparable prior year period, 44,644 and 57,092 stock options, respectively, were exercised at a weighted average exercise price of $931.85 and $725.86, respectively.

As of November 18, 2023, total unrecognized share-based expense related to stock options, net of estimated forfeitures, was approximately $177.9 million, before income taxes, which we expect to recognize over an estimated weighted average period of 3.5 years.

Restricted Stock Units:

Restricted stock unit awards are valued at the market price of a share of the Company’s stock on the date of grant. Grants of employee restricted stock units vest ratably on an annual basis over a four-year service period and are payable in shares of common stock on the vesting date. Compensation expense for grants of employee restricted stock units is recognized on a straight-line basis over the requisite service period, less estimated forfeitures, which are consistent with stock option forfeiture assumptions. Grants of non-employee director restricted stock units are made and expensed on January 1 of each year, as they vest immediately.

As of November 18, 2023, total unrecognized stock-based compensation expense related to nonvested restricted stock unit awards, net of estimated forfeitures, was approximately $12.0 million, before income taxes, which we expect to recognize over an estimated weighted average period of 2.9 years.

Transactions related to restricted stock units for the twelve weeks ended November 18, 2023 were as follows:

Weighted-

    

Number

    

Average Grant

of Shares

Date Fair Value

Nonvested at August 26, 2023

 

8,133

$

1,572.87

Granted

 

2,173

2,549.04

Vested

 

(3,741)

1,383.34

Forfeited

 

(183)

1,933.41

Nonvested at November 18, 2023

 

6,382

$

2,000.23

Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) for the twelve week period ended November 18, 2023, was $22.9 million and $19.0 million for the comparable prior year period.

For the twelve week periods ended November 18, 2023 and November 19, 2022, 169,798 and 87,696 stock options, respectively, were excluded from the diluted earnings per share computation because they would have been anti-dilutive.

See AutoZone’s Annual Report on Form 10-K for the year ended August 26, 2023 and other filings with the SEC, for a discussion regarding the methodology used in developing AutoZone’s assumptions to determine the fair value of the

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option awards and a description of AutoZone’s Amended and Restated 2011 Equity Incentive Award Plan, the AutoZone, Inc. 2020 Omnibus Incentive Award Plan and the Director Compensation Program.

Note L – Segment Reporting

The Company’s operating segments (Domestic Auto Parts, Mexico and Brazil) are aggregated as one reportable segment: Auto Parts Stores. The criteria the Company used to identify the reportable segment are primarily the nature of the products the Company sells and the operating results that are regularly reviewed by the Company’s chief operating decision maker to make decisions about the resources to be allocated to the business units and to assess performance. The accounting policies of the Company’s reportable segment are the same as those described in “Note A – Significant Accounting Policies” in its Annual Report on Form 10-K for the year ended August 26, 2023.

The Auto Parts Stores segment is a retailer and distributor of automotive replacement parts and accessories through the Company’s 7,165 stores in the U.S., Mexico and 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.

The Other category reflects business activities of two operating segments that are not separately reportable due to the materiality of these operating segments. The operating segments include ALLDATA, which produces, sells and maintains diagnostic, repair, collision and shop management software used in the automotive repair industry and E-commerce, which includes direct sales to customers through www.autozone.com for sales that are not fulfilled by local stores.

The Company evaluates its reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. Segment results for the periods presented were as follows:

Twelve Weeks Ended

    

November 18,

    

November 19,

(in thousands)

2023

2022

Net Sales

 

 

  

Auto Parts Stores

$

4,115,694

$

3,915,907

Other

 

74,583

 

69,160

Total

$

4,190,277

$

3,985,067

Segment Profit

 

 

  

Auto Parts Stores

$

2,170,025

$

1,953,728

Other

 

43,991

 

40,894

Gross profit

 

2,214,016

 

1,994,622

Operating, selling, general and administrative expenses

 

(1,365,412)

 

(1,271,589)

Interest expense, net

 

(91,384)

 

(57,723)

Income before income taxes

$

757,220

$

665,310

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

AutoZone, Inc.

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of AutoZone, Inc. (the Company) as of November 18, 2023, the related condensed consolidated statements of income, comprehensive income, stockholders’ deficit and cash flows for the twelve week periods ended November 18, 2023 and November 19, 2022, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of August 26, 2023, the related consolidated statements of income, comprehensive income, stockholders’ deficit and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated October 24, 2023, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of August 26, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Ernst & Young LLP

Memphis, Tennessee

December 18, 2023

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 26, 2023 and other filings we make with the SEC.

Forward-Looking Statements

Certain statements contained herein constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “seek,” “may,” “could” and similar expressions. These are based on assumptions and assessments made by our management in light of experience 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, due to changes in fuel prices, miles driven or otherwise; energy prices; weather, including extreme temperatures, natural disasters and general weather conditions; competition; credit market conditions; cash flows; access to available and feasible financing on favorable terms; 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; inflation, including wage inflation; the ability to hire, train and retain qualified employees including members of management and other key personnel; construction delays; failure or interruption of our information technology systems; issues relating to the confidentiality, integrity or availability of information, including due to cyber-attacks; historic growth rate sustainability; downgrade of our credit ratings; damage to our reputation; challenges associated with doing business in and expanding into international markets; origin and raw material costs of suppliers; inventory availability; disruption in our supply chain; impact of tariffs; impact of new accounting standards; our ability to execute our growth initiatives; and other 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 26, 2023. 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. 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 distributor of automotive replacement parts and accessories in the Americas. We began operations in 1979 and at November 18, 2023, operated 6,316 stores in the U.S., 745 stores in Mexico and 104 stores in Brazil. Each store carries an extensive product line for cars, sport utility vehicles, vans and light duty trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. At November 18, 2023, in 5,803 of our domestic stores as well as the vast majority of our stores in Mexico and Brazil, we had a commercial sales program that provided commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations, fleet owners and other accounts. We also sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com. Additionally, we sell the ALLDATA brand of automotive diagnostic, repair, collision and shop management software through www.alldata.com. We also provide product information on our Duralast branded products through www.duralastparts.com. We do not derive revenue from automotive repair or installation services. Our websites and the information contained therein or linked thereto are not intended to be incorporated into this report.

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Operating results for the twelve weeks ended November 18, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2024. Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarter of fiscal 2024 has 17 weeks and the fourth quarter of fiscal 2023 has 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.

Executive Summary

Net sales increased to $4.2 billion, a 5.1% increase over the prior year period. Our retail and commercial sales in our domestic and international markets grew as we continue to make progress on our growth initiatives. Operating profit increased 17.4% to $848.6 million, net income increased 10.0% to $593.5 million and diluted earnings per share increased 18.6% to $32.55.

During the first quarter of fiscal 2024, failure and maintenance related categories represented the largest portion of our sales mix at approximately 86% of total sales, which is consistent with the comparable prior year period. Failure related categories continue to be the largest portion of our sales mix. 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 weather over a short-term period. Over the long-term, we believe the impact of weather on our sales mix is not significant.

Our business is impacted by various factors within the economy that affect both our consumers and our industry, including but not limited to inflation, fuel costs, wage rates, supply chain disruptions, hiring and other economic conditions. Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future.

The two statistics we believe have the closest correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road. While over the long-term we have seen a close correlation between our net sales and the number of miles driven, we have also seen time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road. The average age of the U.S. light vehicle fleet remains in our industry’s favor as the average age has exceeded 11 years since 2012, according to the latest data provided by the Auto Care Association. As of January 1, 2023, the average age of light vehicles on the road was 12.5 years. Since the beginning of the fiscal year and through September 2023 (latest publicly available information), miles driven in the U.S. increased 0.9% compared to the same period in the prior year.

Twelve Weeks Ended November 18, 2023

Compared with Twelve Weeks Ended November 19, 2022

Net sales for the twelve weeks ended November 18, 2023 increased $205.2 million to $4.2 billion, or 5.1% over net sales of $4.0 billion for the comparable prior year period. This growth was driven primarily by an increase in total company same store sales of 2.1% on a constant currency basis and net sales of $75.7 million from new domestic and international stores. Domestic commercial sales increased $58.6 million to $1.1 billion, or 5.7% over the comparable prior year period.

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

Twelve Weeks Ended

Constant Currency (1)

November 18,

November 19,

November 18,