Share-Based Payments

5 Months Ended

Feb. 10, 2024

Share-Based Payments

Share-Based Payments

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 133,466 shares during the twenty-four week period ended February 10, 2024 and granted options to purchase 157,870 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.

The weighted average fair value of the stock option awards granted during the twenty-four week periods ended February 10, 2024 and February 11, 2023, using the Black-Scholes-Merton multiple-option pricing valuation model, was $913.56 and $760.98 per share, respectively, using the following weighted average key assumptions:

	Twenty-Four Weeks Ended
	February 10,		February 11,
	2024		2023
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 twenty-four week period ended February 10, 2024, and the comparable prior year period, 112,394 and 96,080 stock options, respectively, were exercised at a weighted average exercise price of $848.57 and $709.98, respectively.

As of February 10, 2024, total unrecognized share-based expense related to stock options, net of estimated forfeitures, was approximately $152.9 million, before income taxes, which we expect to recognize over an estimated weighted average period of 3.3 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 four-year 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.

The Company made grants of 3,173 and 3,584 restricted stock unit awards at weighted average grant date fair values of $2,560.56 and $2,267.40, respectively, during the twenty-four week periods ended February 10, 2024 and February 11, 2023.

During the twenty-four week period ended February 10, 2024, and the comparable prior year period, 4,741 and 6,635 restricted stock unit awards, respectively, were vested at a weighted average grant date fair value of $1,617.00 and $1,276.65, respectively.

As of February 10, 2024, total unrecognized stock-based compensation expense related to nonvested restricted stock unit awards, net of estimated forfeitures, was approximately $9.7 million, before income taxes, which we expect to recognize over an estimated weighted average period of 2.8 years.

Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) for the twelve and twenty-four week periods ended February 10, 2024, was $23.0 million and $46.0 million, respectively. For the comparable prior year periods, total share-based compensation expense was $23.4 million and $42.4 million, respectively.

For the twelve and twenty-four week periods ended February 10, 2024, 135,981 and 107,267, respectively, stock options were excluded from the diluted earnings per share computation because they would have been anti-dilutive. For the comparable prior year periods, 156,925 and 122,072 anti-dilutive stock options were excluded from the dilutive earnings per share computation.

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

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.