AutoZone (AZO) 10-K risk factor changes: FY2018 vs FY2017

| | • | | the economy. In periods of declining economic conditions, consumers may [removed: defer] [added: reduce their discretionary spending by deferring] vehicle maintenance or [removed: repair and discretionary spending.] [added: repair.] Additionally, such conditions may affect our customers’ ability to obtain credit. During periods of expansionary economic conditions, more of our DIY customers may pay others to repair and maintain their vehicles instead of working on their own vehicles, or they may purchase new vehicles. |

| | • | | the weather. [removed: Mild] [added: Milder] weather conditions may lower the failure rates of automotive parts, while [removed: wet conditions] [added: extended periods of rain and winter precipitation] may cause our customers to defer maintenance and repair on their vehicles. Extremely hot or cold conditions may enhance demand for our products due to increased failure rates of our customers’ automotive parts. |

| | • | | technological advances. Advances in automotive [removed: technology] [added: technology, such as electric vehicles,] and parts design can result in cars needing maintenance less frequently and parts lasting longer. |

| | • | | restrictions on access to telematics and diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental [removed: regulation, which] [added: regulation. These restrictions] may cause vehicle owners to rely on dealers to perform maintenance and repairs. |

All of these factors could result in [removed: immediate and longer term declines] [added: a decline] in the demand for our products, which could adversely affect our [removed: sales, cash flows] [added: business] and overall financial condition.

We have increased our [removed: location] [added: store] count in the past five fiscal years, growing from [removed: 5,006] [added: 5,201] locations at August [removed: 25, 2012,] [added: 31, 2013,] to [removed: 6,029] [added: 6,202] locations at August [removed: 26, 2017,] [added: 25, 2018,] an average [removed: location] [added: store] increase per year of 4%.

Additionally, we have increased annual revenues in the past five fiscal years from [removed: $8.604] [added: $9.148] billion in fiscal [removed: 2012] [added: 2013] to [removed: $10.889] [added: $11.221] billion in fiscal [removed: 2017,] [added: 2018,] an average increase per year of 5%.

Annual revenue growth is driven by the opening of new [removed: locations,] [added: stores,] the development of new commercial programs and increases in same store sales.

We open new [removed: locations] [added: stores] only after evaluating customer buying trends and market demand/needs, all of which could be adversely affected by persistent unemployment, wage cuts, small business failures and microeconomic conditions unique to the automotive industry.

Same store sales are impacted both by customer demand levels and by the prices we are able to charge for our products, which can also be negatively impacted by the economic [removed: pressures mentioned above.][added: pressures.]

We cannot provide any assurance that we will continue to open [removed: locations] [added: stores] at historical rates or continue to achieve increases in same store sales.

Job growth in the [removed: U.S.] [added: United States] was stagnated and unemployment was at historically high levels during the Great Recession; however, in recent years, the unemployment rate has improved to [added: below] pre-recession levels.

Over the [removed: short term,] [added: short-term,] such factors could positively impact our business.

We believe that much of our brand value lies in the quality of the [removed: more than 87,000] [added: approximately 90,000] AutoZoners employed in our stores, distribution centers, store support [removed: centers, ALLDATA, AutoAnything] [added: centers] and [removed: IMC.][added: ALLDATA.]

Our workforce costs represent our largest operating expense, and our business is subject to employment laws and regulations, including requirements [removed: related to minimum wage and benefits.]

If [added: we experience transitions or changeover with] any of our significant [removed: vendors] [added: vendors, or if they] experience financial difficulties or otherwise are unable to deliver merchandise to us on a timely basis, or at all, we could have product shortages in our stores that could adversely affect customers’ perceptions of us and cause us to lose customers and sales.

We directly imported approximately [removed: 10%] [added: 13%] of our purchases in fiscal [removed: 2017,] [added: 2018,] but many of our domestic vendors directly import their products or components of their products.

Disruptions in the price or flow of these goods for any reason, such as political unrest or acts of war, currency fluctuations, disruptions in maritime lanes, port labor disputes and economic conditions and instability in the countries in which foreign suppliers are located, the financial instability of suppliers, suppliers’ failure to meet our standards, issues with labor practices of our suppliers or labor problems they may experience (such as strikes, stoppages or slowdowns, which could also increase labor costs during and following the disruption), the availability and cost of raw materials to suppliers, increased import [removed: duties,] [added: duties or tariffs,] merchandise quality or safety issues, transport availability and cost, increases in wage rates and taxes, transport security, inflation and other factors relating to the suppliers and the countries in which they are located or from which they import, are beyond our control and could adversely affect our operations and profitability.

[removed: Accomplishing our new and existing location expansion goals will depend upon a number of factors, including the ability to] partner with developers and landlords to obtain suitable sites for new and expanded locations at acceptable costs, the hiring and training of qualified personnel and the integration of new locations into existing operations.

We accept payments using a variety of methods, including cash, checks, credit, [removed: debit] [added: debit, electronic payments] and gift cards, and we may offer new payment options over time, which may have information security risk implications.

To the extent that any cyber-attack or [removed: incursion] [added: intrusion] in our or one of our third-party service provider’s information systems results in the loss, damage or misappropriation of information, we may be materially adversely affected by claims from customers, financial institutions, regulatory authorities, payment card networks and others.

The risks and uncertainties described below could materially and adversely affect our business, financial condition, operating results and stock price.

The following information should be read in conjunction with the other information contained in this report and other filings that we make with the SEC.

Some online businesses have lower operating costs than we do.

related to minimum wage and benefits.

Accomplishing our new and existing location expansion goals will depend upon a number of factors, including the ability to

Set forth below are certain of the important risks that we face, the occurrence of which could have a material adverse effect on our business.

For the long term, demand for our products may be affected by:

Some online businesses have lower operating costs than we do and may not be required to collect and remit sales taxes in all U.S. states, which may negatively impact our ability to be price-competitive on a tax-included basis.

We began operations in 1979 and at August [removed: 26, 2017,] [added: 25, 2018,] operated [removed: 5,465 AutoZone] [added: 5,618] stores in the United States, including Puerto Rico; [removed: 524] [added: 564] stores in Mexico; [removed: 14] [added: and 20] stores in [removed: Brazil; and 26 IMC branches.][added: Brazil.]

Each [removed: AutoZone] store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

At August [removed: 26, 2017,] [added: 25, 2018,] in [removed: 4,592] [added: 4,741] of our domestic [removed: AutoZone] 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 [removed: AutoZone] stores in Mexico and Brazil.

Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and [removed: accessories, performance and replacement parts through www.autoanything.com, and] our commercial customers can make purchases through [removed: www.autozonepro.com and www.imcparts.net.][added: www.autozonepro.com.]

For fiscal [removed: 2017,] [added: 2018,] we achieved record net income of [removed: $1.281] [added: $1.338] billion, a [removed: 3.2%] [added: 4.4%] increase over the prior year, and sales growth of [removed: $253.0] [added: $332.4] million, a [removed: 2.4%] [added: 3.1%] increase over the prior year.

One macroeconomic factor affecting our customers and our industry during fiscal [removed: 2017] [added: 2018] was gas prices.

During fiscal [removed: 2017,] [added: 2018,] the average price per gallon of unleaded gasoline in the United States was [removed: $2.31] [added: $2.67] per gallon, compared to [removed: $2.14] [added: $2.31] per gallon during fiscal [removed: 2016.][added: 2017.]

We have also experienced accelerated pressure on wages in the United States during fiscal [removed: 2017.][added: 2018.]

During fiscal [removed: 2017,] [added: 2018,] failure and maintenance related categories represented the largest portion of our sales mix, at approximately 84% of total sales, with failure related categories continuing to [removed: be] [added: comprise] our largest set of categories.

Our primary response to fluctuations in the demand for the products we sell is to adjust our advertising message, store [removed: staffing,] [added: staffing] and product assortment.

[removed: As part of those tests,] [added: In recent years,] we closely studied our hub distribution model, store inventory levels and product assortment, which led to strategic tests on increased frequency of delivery to our domestic stores and significantly expanding parts [removed: and] assortment in select domestic stores we call mega hubs.

Since the beginning of the fiscal year and through [removed: June 2017] [added: July 2018] (latest publicly available information), miles driven in the U.S. increased by [removed: 1.2%] [added: 0.5%] compared to the same period in the prior year.

According to the latest data provided by the Auto Care Association, as of January 1, [removed: 2017,] [added: 2018,] the average age of vehicles on the road [removed: is] [added: was] 11.7 [removed: years as compared to 11.6 years as of January 1, 2016.][added: years.]

[removed: However, in the near term, we] [added: We] expect the aging vehicle population to continue to increase as consumers keep their cars longer in an effort to save money.

At August 26, 2017, we operated 5,465 domestic AutoZone stores, 524 in Mexico, 14 in Brazil, and 26 IMC branches compared with 5,297 domestic AutoZone stores, 483 in Mexico, eight in [removed: Brazil,] [added: Brazil] and 26 IMC branches at August 27, 2016.

We reported a total auto parts (domestic, Mexico, [removed: Brazil,] [added: Brazil] and IMC) sales increase of 2.6% for fiscal 2017.

This increase was primarily due to higher borrowing levels and [removed: borrowing] rates.

_Fiscal [removed: 2016] [added: 2018] Compared with Fiscal [removed: 2015_][added: 2017_]

For the fiscal year ended August [removed: 27, 2016,] [added: 25, 2018,] we reported net sales of [removed: $10.636] [added: $11.221] billion compared with [removed: $10.187] [added: $10.889] billion for the year ended August [removed: 29, 2015,] [added: 26, 2017,] a [removed: 4.4%] [added: 3.1%] increase from fiscal [removed: 2015.][added: 2017.]

This growth was driven primarily by [removed: domestic same store sales increase of 2.4% and] net sales of [removed: $177.0] [added: $196.5] million from new domestic [removed: AutoZone stores.][added: stores and a domestic same store sales increase of 1.8%.]

Domestic commercial sales [removed: for fiscal 2016] increased [removed: $129.8] [added: $151.4] million, or [removed: 7.1%,] [added: 7.3%,] over domestic commercial sales for fiscal [removed: 2015.][added: 2017.]

At August [removed: 27, 2016,] [added: 25, 2018,] we operated [removed: 5,297] [added: 5,618] domestic [removed: AutoZone] stores, [removed: 483 in Mexico, eight] [added: 564] in [removed: Brazil] [added: Mexico] and [removed: 26 IMC branches] [added: 20 in Brazil,] compared with [removed: 5,141] [added: 5,465] domestic [removed: AutoZone] stores, [removed: 441] [added: 524] in Mexico, [removed: seven] [added: 14] in Brazil and [removed: 20] [added: 26] IMC branches at August [removed: 29, 2015.][added: 26, 2017.]

We reported a total auto parts [added: segment] (domestic, Mexico, Brazil and [removed: IMC)] [added: IMC through April 4, 2018)] sales increase of [removed: 4.4%] [added: 4.1%] for fiscal [removed: 2016.][added: 2018.]

Gross profit for fiscal [removed: 2016] [added: 2018] was [removed: $5.609] [added: $5.974] billion, or [removed: 52.7%] [added: 53.2%] of net sales, [added: a 53 basis point increase] compared with [removed: $5.327] [added: $5.740] billion, or [removed: 52.3%] [added: 52.7%] of net sales for fiscal [removed: 2015.][added: 2017.]

Operating, selling, general and administrative expenses for fiscal [removed: 2016] [added: 2018] increased to [removed: $3.548] [added: $4.163] billion, or [removed: 33.4%] [added: 37.1%] of net sales, from [removed: $3.374] [added: $3.660] billion, or [removed: 33.1%] [added: 33.6%] of net sales for fiscal [removed: 2015.][added: 2017.]

Interest expense, net for fiscal [removed: 2016] [added: 2018] was [removed: $147.7] [added: $174.5] million compared with [removed: $150.4] [added: $154.6] million during fiscal [removed: 2015.][added: 2017.]

Average borrowings for fiscal [removed: 2016] [added: 2018] were [removed: $4.860] [added: $4.997] billion, compared with [removed: $4.520] [added: $5.070] billion for fiscal [removed: 2015] [added: 2017,] and weighted average borrowing rates were [removed: 2.7%] [added: 3.2%] for fiscal [removed: 2016,] [added: 2018,] compared to [removed: 3.0%] [added: 2.8%] for fiscal [removed: 2015.][added: 2017.]

Our effective income tax rate was [removed: 35.1%] [added: 18.3%] of pre-tax income for fiscal [removed: 2016] [added: 2018] compared to [removed: 35.6%] [added: 33.5%] for fiscal [removed: 2015.][added: 2017.]

Net income for fiscal [removed: 2016] [added: 2018] increased by [removed: 7.0%] [added: 4.4%] to [removed: $1.241] [added: $1.338] billion, and diluted earnings per share increased [removed: 13.0%] [added: 10.7%] to [removed: $40.70] [added: $48.77] from [removed: $36.03] [added: $44.07] in fiscal [removed: 2015.][added: 2017.]

The impact [removed: of] [added: on] the fiscal [removed: 2016 stock repurchases on] [added: 2018] diluted earnings per share [removed: in fiscal 2016] [added: from stock repurchases] was an increase of [removed: approximately $1.17.][added: $1.36.]

Our business is somewhat seasonal in nature, with the highest sales typically occurring in the spring and summer months of February through September, in which average weekly per-store sales historically have been about [removed: 15%] [added: 10%] to 20% higher than in the slower months of December and January.

Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consisted of 16 weeks in [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015.][added: 2016.]

The fourth quarter of fiscal year [removed: 2017] [added: 2018] represented [removed: 32.3%] [added: 31.7%] of annual sales and [removed: 33.9%] [added: 29.9%] of net income; the fourth quarter of fiscal year [removed: 2016] [added: 2017] represented [removed: 32.0%] [added: 32.3%] of annual sales and [removed: 34.4%] [added: 33.9%] of net income; and the fourth quarter of fiscal [removed: 2015] [added: 2016] represented [removed: 32.3%] [added: 32.0%] of annual sales and [removed: 34.6%] [added: 34.4%] of net income.

Net cash provided by operating activities was [removed: $1.571] [added: $2.080] billion in [removed: 2017, $1.641] [added: 2018, $1.571] billion in [removed: 2016,] [added: 2017,] and [removed: $1.573] [added: $1.641] billion in fiscal [removed: 2015.][added: 2016.]

Cash flows from operations are [removed: unfavorable] [added: favorable] compared to last year primarily due to [added: the] timing of payment of accounts payable and [removed: accrued expenses, partially offset by] growth in net income [removed: and a decrease in pension contributions.][added: due to the benefits of Tax Reform.]

From the beginning of fiscal [removed: 2015] [added: 2016] to August [removed: 26, 2017,] [added: 25, 2018,] we have opened [removed: 622] [added: 621] new locations.

We opened two distribution centers in fiscal 2017 and [removed: currently have] one [removed: additional distribution center under development.][added: in fiscal 2018.]

Net cash flows used in investing activities were [removed: $553.6] [added: $521.9] million in fiscal [removed: 2017,] [added: 2018,] compared to [removed: $505.8] [added: $553.6] million in fiscal [removed: 2016] [added: 2017] and [removed: $567.9] [added: $505.8] million in fiscal [removed: 2015.][added: 2016.]

We invested [removed: $553.8] [added: $521.8] million in capital assets in fiscal [removed: 2017,] [added: 2018,] compared to [removed: $488.8] [added: $553.8] million in fiscal [removed: 2016] [added: 2017] and [removed: $480.6] [added: $488.8] million in fiscal [removed: 2015.][added: 2016.]

During fiscal 2018, we completed our testing and implemented new frequencies resulting in approximately 25% of our stores, representing 40% of our retail sales volume and nearly 50% of our commercial sales volume, receiving distribution center deliveries three or more times per week.

New vehicles sales declined 1.5% during 2018 as compared to the prior year, which is the first year-over-year decrease since 2009.

For the seventh consecutive year, the average age of vehicles has exceeded 11 years.

The increase in gross margin was attributable to the favorable impact of the sale of two businesses (+34 basis points) and higher merchandise margins, partially offset by higher supply chain costs.

The increase in operating expenses, as a percentage of sales, was primarily due to second quarter impairment charges (-172 basis points), and fourth quarter charges related to the termination of our pension plans (-116 basis points).

See “Note M – Sale of Assets” and “Note L – Pension and Savings Plan” in the Notes to Consolidated Financial Statements.

This increase was primarily due to higher borrowing rates.

The lower tax rate resulted primarily from the enactment of Tax Reform during the second quarter ended February 10, 2018 (see “Note D—Income Taxes” in the Notes to Consolidated Financial Statements).

Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (“Tax Reform”) into law.

Tax Reform contains several key provisions that affected the Company during fiscal 2018.

The enacted provisions impacting the current financial statements include a mandatory one-time transition tax on certain earnings of foreign subsidiaries and a permanent reduction of the U.S. corporate income tax rate from 35 to 21%, effective January 1, 2018.

As the Company has an August 25th fiscal year-end, the impact of the lower rate will be blended resulting in a U.S. statutory federal tax rate of approximately 25.9% for the fiscal year ending August 25, 2018, and a 21% U.S. statutory federal rate for fiscal years thereafter.

Other enacted provisions which may impact the Company beginning in fiscal 2019 include: eliminating U.S. federal taxation of future remitted foreign earnings; other new international provisions requiring current inclusion of certain earnings of controlled foreign corporations; immediate expensing of capital assets; and limitations on other tax deductions such as deductibility of executive compensation, interest expense, lobbying expenses, meals and entertainment expenses, and the domestic production activities deduction.

The Company has withdrawn its assertion regarding the permanent reinvestment of current and accumulated earnings of non-U.S. subsidiaries, but maintained its permanent reinvestment assertion on other basis differences related to non-U.S. subsidiaries.

The Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of Tax Reform.

To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform.

The ultimate impact may differ from provisional amounts recorded, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued.

The accounting is expected to be completed within one year from the enactment date of Tax Reform.

Based on our current analysis, we recorded a provisional income tax benefit of $131.5 million in our Consolidated Financial Statements for the year ended August 25, 2018.

We were able to determine a reasonable estimate for the mandatory one-time transition tax as an increase tax expense of $25.8 million and for the re-measurement of our net U.S. federal deferred tax liability at the lower rate, a reduction to tax expense of $157.3 million.

Our analysis of these items is incomplete at this time.

We will complete the accounting for these items during the measurement period, which will not extend beyond one year from the enactment date.

Our effective income tax rate was 18.3% of pre-tax income for fiscal 2018 compared to 33.5% for fiscal 2017.

The lower tax rate resulted from the $131.5 million provisional amount discussed above, $31.3 million of excess tax benefits from option exercises, and a $119.2 million benefit from the reduction of the U.S. statutory rate from 35% to approximately 25.9%.

The decrease in capital expenditures from fiscal 2017 was primarily attributable to the construction of the one distribution center in fiscal 2018 compared to two distribution centers in fiscal 2017.

The Company did not issue any new debt in fiscal 2018 compared to $600 million for fiscal 2017 and $650 million for fiscal 2016.

In fiscal 2018, we used commercial paper borrowings to repay the $250 million Senior Notes due in August 2018.

Net proceeds from the issuance of commercial paper and short-term borrowings for fiscal 2018 were $170.2 million.

During fiscal 2019, we expect to increase the investment in our business as compared to fiscal 2018.

During fiscal 2018, our capital expenditures decreased by approximately 6% compared to the prior year period.

The increase from fiscal 2017 to fiscal 2018 was primarily due to more favorable vendor terms.

For fiscal 2018, after-tax operating profit was adjusted for impairment charges, pension termination charges and Tax Reform’s impact on the revaluation of deferred tax liabilities, net of the repatriation tax.

We entered into a Master Extension, New Commitment and Amendment Agreement dated as of November 18, 2017 (the “Extension Amendment”) to the Third Amended and Restated Credit Agreement dated as of November 18, 2016, as amended, modified, extended or restated from time to time (the “Revolving Credit Agreement”).

Under the Extension Amendment: (i) our borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion; (ii) our option to increase the borrowing capacity under the Revolving Credit Agreement was “refreshed” and the amount of such option remained at $400 million;

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 from November 18, 2021 until November 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.

For fiscal 2018, net income was adjusted to exclude impairment charges and pension termination charges before tax impact as these charges are not reflective of ongoing operations.

On March 20, 2018, the Board voted to increase the authorization by $1.0 billion.

This raised the total value of shares authorized to be repurchased to $19.65 billion.

IMC branches carry an extensive line of original equipment quality import replacement parts.

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In recent years, we initiated a variety of strategic tests focused on increasing inventory availability in our domestic stores.

During fiscal 2015, we concluded our tests on these specific new concepts.

During fiscal 2016 and most of fiscal 2017, we continued the implementation of more frequent deliveries from our distribution centers to additional domestic stores and the execution of our mega hub strategy.

In the fourth quarter of fiscal 2017, however, we made substantial changes to test different scenarios to determine the optimal approach around increased delivery frequency.

We expect to conclude this test in fiscal 2018.

Between 2008 and 2012, new vehicle sales were significantly lower than historical levels, which we believe contributed to an increasing number of seven year old or older vehicles on the road.

Although the average age of vehicles continues to increase, it is increasing at a decelerated rate primarily driven by the improvement in new car sales in recent years.

The Company’s adoption of the new accounting guidance for share-based payments increased earnings per share by $0.81, driven by a lower effective tax rate of 162 basis points, (a $1.08 benefit to earnings per share), partially offset by a change to the dilutive outstanding shares calculations (a $0.27 reduction to earnings per share).

Excluding the $0.81 net benefit for the year from the adoption of this new standard, adjusted diluted earnings per share increased 6.3% to $43.26.

We believe that adjusted diluted earnings per share provides us with an understanding of the results from the primary operations of our business by excluding the tax effects of option exercise activity.

We use adjusted diluted earnings per share to evaluate period-over-period operating performance because we believe it provides a more comparable measure of our continuing business by adjusting for items that are not reflective of the normal earnings of our business.

This measure may be useful to an investor in evaluating the underlying operating performance of our business.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section for further details of our calculation.

The improvement in gross margin was attributable to lower acquisition costs, partially offset by higher supply chain costs associated with current year inventory initiatives (–18 basis points).

The increase in operating expenses, as a percentage of sales, was primarily due to higher store payroll.

This decrease was primarily due to a decline in borrowing rates, partially offset by higher borrowing levels over the comparable year period.

The decrease in the effective income tax rate was driven by a discrete tax item during fiscal 2016.

The increase in capital expenditures during this time was primarily attributable to the building of the new distribution centers and increased investment in our existing locations.

Cash flows used in the acquisition of IMC were $75.7 million in fiscal 2015.

Proceeds from issuance of debt were $600 million for fiscal 2017 and $650 million for each of fiscal 2016 and 2015.

In fiscal 2015, the proceeds from the issuance of debt were used for the repayment of a portion of our outstanding commercial paper borrowings, which were used to repay the $500 million 5.750% Senior Notes due January 2015 and for the acquisition of IMC.

During fiscal 2018, we expect to invest in our business at a decreased rate as compared to fiscal 2017, as fiscal 2017 included significant investment for the building of new distribution centers.

by providing extended payment terms.

The decrease from fiscal 2016 to fiscal 2017 was due to inventory growth and slowing inventory turns.

We intend to continue to permanently reinvest the cash held outside of the U.S. in our foreign operations.

Currently, these investments are diluting our return metrics.

On November 18, 2016, we amended and restated our existing Multi-Year revolving credit facility (the “New Multi-Year Revolving Credit Agreement”) by increasing the committed credit amount from $1.25 billion to $1.6 billion, extending the expiration date by two years and renegotiating other terms and conditions.

This credit facility is available to primarily support commercial paper borrowings, letters of credit and other short-term unsecured bank loans.

The capacity of the credit facility may be increased to $2.1 billion prior to the maturity date at our election and subject to bank credit capacity and approval, and may include up to $200 million in letters of credit.

We also have the option to borrow funds under the terms of a swingline loan subfacility.

The revolving credit facility expires on November 18, 2021, but we may, by notice to the administrative agent, make up to two requests to extend the termination date for an additional period of one year.

The first such request must be made no earlier than 60 days, and no later than 45 days, prior to November 18, 2017, while the second request must be made no earlier than 60 days, and no later than 45 days, prior to November 18, 2018.

On November 18, 2016, we amended and restated our existing 364-Day revolving credit facility (the “New 364-Day Credit Agreement”) by decreasing the committed credit amount from $500 million to $400 million, extending the expiration date by one year and renegotiating other terms and conditions.

The credit facility is available to primarily support commercial paper borrowings and other short-term unsecured bank loans.

Under the credit facility, 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 margin, as defined in the revolving credit facility, depending upon our senior, unsecured, (non-credit enhanced) long-term debt rating.

The New 364-Day Credit Agreement expires on November 17, 2017, but we may request an extension of the term date for 364 days no later than 45 days prior to November 17, 2017, subject to bank approval.

In addition, at least 15 days prior to November 17, 2017, we have the right to convert the credit facility to a term loan for up to one year from the termination date, subject to a 1% penalty.

The fair value of our debt was estimated at [removed: $5.171] [added: $4.948] billion as of August [removed: 26, 2017,] [added: 25, 2018,] and [removed: $5.117] [added: $5.171] billion as of August [removed: 27, 2016,] [added: 26, 2017,] based on the quoted market prices for the same or similar debt issues or on the current rates available to us for debt having the same remaining maturities.

[removed: Such] [added: At August 26, 2017, the] fair value [removed: is] [added: was] greater than the carrying value of debt by $90.3 [removed: million and $192.7 million at August 26, 2017 and August 27, 2016, respectively.][added: million.]

We had [removed: $1.155] [added: $1.325] billion of variable rate debt outstanding at August [removed: 26, 2017,] [added: 25, 2018,] and [removed: $1.198] [added: $1.155] billion of variable rate debt outstanding at August [removed: 27, 2016.][added: 26, 2017.]

In fiscal [removed: 2017,] [added: 2018,] at this borrowing level for variable rate debt, a one percentage point increase in interest rates would have had an unfavorable impact on our pre-tax earnings and cash flows of approximately [removed: $11.6] [added: $13.3] million.

We had outstanding fixed rate debt of [removed: $3.926] [added: $3.681] billion, net of unamortized debt issuance costs of [removed: $23.9] [added: $19.4] million, at August [removed: 26, 2017,] [added: 25, 2018,] and [removed: $3.727] [added: $3.926] billion, net of unamortized debt issuance costs of [removed: $23.4] [added: $23.9] million, at August [removed: 27, 2016.][added: 26, 2017.]

A one percentage point increase in interest rates would reduce the fair value of our fixed rate debt by approximately [removed: $191.3] [added: $153.6] million at August [removed: 26, 2017.][added: 25, 2018.]

The net asset exposure in the Mexican subsidiaries translated into U.S. dollars using the year-end exchange rates was [added: $590.7 million at August 25, 2018 and] $519.3 million at August 26, [removed: 2017 and $398.0.][added: 2017.]

The year-end exchange rates with respect to the Mexican peso [removed: increased] [added: decreased] by approximately [removed: 4%] [added: 6%] with respect to the U.S. dollar during fiscal [removed: 2017] [added: 2018] and [removed: decreased] [added: increased] by approximately [removed: 9%] [added: 4%] during fiscal [removed: 2016.][added: 2017.]

The potential loss in value of our net assets in the Mexican subsidiaries resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates at August [removed: 26, 2017] [added: 25, 2018] and August [removed: 27, 2016,] [added: 26, 2017,] would be approximately [removed: $47.2] [added: $53.7] million and approximately [removed: $36.2] [added: $47.2] million, respectively.

Such fair value is less than the carrying value of debt by $57.5 million at August 25, 2018, which reflects its face amount, adjusted for any unamortized debt issuance costs and discounts.

_Fuel Price Risk_

From time to time, we utilize fuel swap contracts in order to lower fuel cost volatility in our operating results.

Historically, the instruments were executed to economically hedge a portion of our diesel and unleaded fuel exposure.

However, we have not designated the fuel swap contracts as hedging instruments; and therefore, the contracts have not qualified for hedge accounting treatment.

In fiscal 2015, we entered into a fuel swap to economically hedge the commodity cost associated with our unleaded fuel usage.

The notional amount of the contract was 2.9 million gallons and terminated March 31, 2015.

The swap had no significant impact on the results of operations.

We did not enter into any fuel swap contracts during fiscal 2017 or 2016.

million at August 27, 2016.

We began operations in 1979 and at August [removed: 26, 2017,] [added: 25, 2018,] operated [removed: 5,465 AutoZone] [added: 5,618] stores in the United States, including Puerto Rico; [removed: 524] [added: 564] stores in Mexico; [removed: 14] [added: and 20] stores in [removed: Brazil; and 26 Interamerican Motor Corporation (“IMC”) branches.][added: Brazil.]

Each [removed: AutoZone] store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

At August [removed: 26, 2017,] [added: 25, 2018,] in [removed: 4,592] [added: 4,741] of our domestic [removed: AutoZone] 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 [removed: AutoZone] stores in Mexico and Brazil.

Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and [removed: accessories, performance and replacement parts through www.autoanything.com, and] our commercial customers can make purchases through [removed: www.autozonepro.com and www.imcparts.net.][added: www.autozonepro.com.]

At August [removed: 26, 2017,] [added: 25, 2018,] our [removed: AutoZone] stores [removed: and IMC branches] were in the following locations:

| Arkansas | | | [removed: 64] [added: 66] | |

| Colorado | | | [removed: 87] [added: 90] | |

| Connecticut | | | [removed: 47] [added: 49] | |

| Hawaii | | | [removed: 4] [added: 8] | |

| Idaho | | | [removed: 28] [added: 29] | |

| Iowa | | | [removed: 29] [added: 32] | |

| Kansas | | | [removed: 50] [added: 53] | |

| Kentucky | | | [removed: 95] [added: 97] | |

| Maryland | | | [removed: 75] [added: 78] | |

| Massachusetts | | | [removed: 81] [added: 82] | |

| Mississippi | | | [removed: 94] [added: 95] | |

| Nebraska | | | [removed: 20] [added: 21] | |

| Nevada | | | [removed: 64] [added: 65] | |

| New Jersey | | | [removed: 96] [added: 102] | |

| New York | | | [removed: 189] [added: 198] | |

| North Carolina | | | [removed: 219] [added: 221] | |

| North Dakota | | | [removed: 3] [added: 5] | |

| Oregon | | | [removed: 43] [added: 47] | |

| Puerto Rico | | | [removed: 43] [added: 45] | |

| South Dakota | | | [removed: 7] [added: 8] | |

| Utah | | | [removed: 58] [added: 59] | |

| Washington | | | [removed: 88] [added: 92] | |

| Wisconsin | | | [removed: 67] [added: 69] | |

| Total Domestic [removed: AutoZone] stores | | | [removed: 5,465] [added: 5,618] | |

| Brazil | | | [removed: 14] [added: 20] | |

| Total [removed: AutoZone] stores | | | [removed: 6,003] [added: 6,202] | |

Additionally, we offer [added: a] smartphone [removed: apps] [added: app] that [removed: provide] [added: provides] customers with store locations, driving directions, operating hours, ability to purchase products and product availability.

| A/C Compressors Batteries & Accessories Bearings Belts & Hoses Calipers Carburetors Chassis Clutches CV Axles Engines Fuel Pumps Fuses Ignition Lighting Mufflers Radiators [removed: Tire Repair Thermostats] Starters & Alternators [added: Thermostats Tire Repair] Water Pumps | | Antifreeze & Windshield Washer Fluid Brake Drums, Rotors, Shoes & Pads Chemicals, including Brake & Power Steering Fluid, Oil & Fuel Additives Oil & Transmission Fluid Oil, Air, Fuel & Transmission Filters Oxygen Sensors Paint & Accessories Refrigerant & Accessories Shock Absorbers & Struts Spark Plugs & Wires Windshield Wipers | | Air Fresheners Cell Phone Accessories Drinks & Snacks Floor Mats & Seat Covers Interior & Exterior Accessories Mirrors Performance Products Protectants & Cleaners Sealants & Adhesives Steering Wheel Covers Stereos & Radios Tools Wash & Wax |

A key differentiating component versus our competitors is our exclusive line of in-house brands, which includes the [removed: Valucraft,] AutoZone, [removed: SureBilt, ProElite,] Duralast, Duralast Max, Duralast Gold, Duralast Platinum, Duralast [removed: ProPower and] [added: ProPower,] Duralast [removed: GT brands.][added: GT, Valucraft, SureBilt and ProElite.]

The typical [removed: AutoZone] store utilizes colorful exterior and interior signage, exposed beams and ductwork and brightly lit interiors.

Our commercial sales program operates in a highly fragmented market, and we are one of the leading distributors of automotive parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts in the United States, Puerto [removed: Rico] [added: Rico, Mexico] and [removed: Mexico.][added: Brazil.]

As a part of the domestic store program, we offer credit and delivery to our customers, as well as online ordering through [removed: www.autozonepro.com and www.imcparts.net.][added: www.autozonepro.com.]

Substantially all [removed: AutoZone] stores are based on standard store formats, resulting in generally consistent appearance, merchandising and product mix.

We provide on-the-job training as well as formal training programs, including an annual national sales [removed: meeting,] [added: meeting with related cascading meetings at our distribution centers, regional offices and stores;] store meetings on specific sales and product [removed: topics,] [added: topics;] standardized [added: computer-based] training [removed: manuals] [added: to support culture, safety, salesmanship, compliance] and [removed: computer based modules] [added: product] and [removed: a specialist program that provides training] [added: job knowledge; and several specialist, vendor and third-party programs] to [removed: AutoZoners] [added: support learning and development] in [removed: several] areas [removed: of] [added: requiring] technical expertise [removed: from the Company, our vendors] and [removed: independent certification agencies.][added: specific job knowledge.]

| | | Store Count | | |

| Alabama | | | 113 | |

| Arizona | | | 142 | |

| California | | | 602 | |

| Florida | | | 334 | |

| Georgia | | | 201 | |

| Indiana | | | 156 | |

| Louisiana | | | 124 | |

| Michigan | | | 194 | |

| Missouri | | | 113 | |

| Ohio | | | 266 | |

| Pennsylvania | | | 189 | |

| Tennessee | | | 166 | |

| Texas | | | 610 | |

| Virginia | | | 131 | |

| Mexico | | | 564 | |

All domestic AutoZoners are encouraged to complete our in-house product knowledge program and Parts Expert certification, which is developed in partnership with our key suppliers.

Advanced leadership training is an additional area of investment that is used to deepen bench strength and support succession planning.

| Sold(2) | | | 26 | | | | — | | | | — | | | | — | | | | — | |

| _(2)_ | _26 IMC branches sold on April 4, 2018. See “Note M – Sale of Assets” for more information._ |

| --- | --- |

In recent years, we closely studied our hub distribution model, store inventory levels and product assortment, which led to strategic tests on increased frequency of delivery to our domestic stores and significantly expanding parts assortment in select domestic stores we call mega hubs.

During fiscal 2018, we completed our testing and implemented new frequencies resulting in approximately 25% of our stores, representing 40% of our retail sales volume and nearly 50% of our commercial sales volume, receiving distribution center deliveries three or more times per week.

Mr. Finestone also serves as Chairman of the Auto Care Association.

On September 27, 2018, Mr. Graves announced his retirement from the Company, which will be effective early January 2019.

On August 27, 2018, Mr. Halsell announced his retirement from the Company, which will be effective November 10, 2018.

Domingo José Hurtado Rodríguez was named Senior Vice President, International in September 2018.

Prior to that, he was President, AutoZone de México.

Mr. Hurtado has served in various capacities within the Company since 2001, which included leading the Company’s expansion into Mexico.

Prior to 2001, he held different positions with RadioShack including Director General in Mexico and General Manager in Venezuela.

IMC branches carry an extensive line of original equipment quality import replacement parts.

| | | | | |

| | | Location Count | | |

| Alabama | | | 110 | |

| Arizona | | | 136 | |

| California | | | 585 | |

| Florida | | | 318 | |

| Georgia | | | 200 | |

| Indiana | | | 155 | |

| Louisiana | | | 123 | |

| Michigan | | | 188 | |

| Missouri | | | 112 | |

| Ohio | | | 259 | |

| Pennsylvania | | | 177 | |

| Tennessee | | | 165 | |

| Texas | | | 597 | |

| Virginia | | | 123 | |

| Mexico | | | 524 | |

| IMC branches | | | 26 | |

| Total locations | | | 6,029 | |

All domestic AutoZoners are encouraged to complete tests resulting in certifications by the National Institute for Automotive Service Excellence (“ASE”), which is broadly recognized for training certification in the automotive industry.

When selecting future sites and market locations for our IMC branches, we look for locations close to major highways to support IMC’s delivery schedule and also consider the population of AutoZone stores in the market.

Merchandise is selected and purchased for all IMC branches through our branch support center located in Canoga Park, California.

During fiscal 2014 and 2015, we tested two new concepts of our domestic supply chain strategy, increased delivery frequency to our stores utilizing our distribution centers and significantly expanded parts assortments in select stores we call mega hubs.

Our tests were concluded during fiscal 2015, and both initiatives were expanded to additional locations in fiscal 2016 and 2017.

Increased delivery frequency focuses on improving our in-stock position of our core store-stocked product by providing deliveries to certain stores multiple times per week.

We are continuing to test our new frequency of delivery for certain volume stores to ensure the model is producing sufficient benefit to justify the costs.

We had roughly 2,300 stores receiving more deliveries multiple times per week at the end of the third quarter of fiscal 2017.

As the results have not been conclusive to date, we are continuing to test different scenarios to determine the optimal approach.

_James C.

James C.

Griffith was named Senior Vice President – Store Operations in November 2015.

Prior to that, he was Vice President – Store Development since October 2010 and Vice President – Store Operations since 2007.

Prior thereto, he held several management positions within the Company.

We have contested, and will continue to contest, any such assertions due to the existence of other entities/sources of [removed: contamination, some of which are named in the Directives and the April 23, 2015 demand, in the area of the property.]

Pursuant to the Voluntary Remediation Agreement, upon completion of all remediation required by the agreement, we believe we should be eligible to be reimbursed up to [removed: 75 percent] [added: 75%] of qualified remediation costs by the State of New Jersey.

We have asked the state for clarification that the agreement applies to off-site [removed: work, and the state is considering the request.][added: work.]

Although the aggregate amount of additional costs that we may incur pursuant to the remediation cannot currently be ascertained, we do not currently believe that fulfillment of our obligations under the agreement or otherwise will result in costs that are material to our financial condition, results of operations or cash [removed: flow.][added: flows.]

[removed: In] [added: Arising out of an] April [removed: 2016, we received a] [added: 2016] letter from the California Air Resources Board [added: (“CARB”), one of our formerly-owned subsidiaries was sued in March 2018 by CARB] seeking [removed: payment] [added: penalties, among other relief,] for alleged violations of the California Health and Safety [added: Code, Title 13 of the California] Code [added: of Regulations and the California Vehicle Code] related to the sale [added: and advertisement] of certain aftermarket [removed: emission] [added: motor vehicle pollution control] parts in the State of California.

We are involved in various other legal proceedings incidental to the conduct of our business, [removed: including] [added: including, but not limited to,] several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices.

contamination, some of which are named in the Directives and the April 23, 2015 Demand, in the area of the property.

On February 26, 2018, we completed our transaction to sell substantially all of the assets, net of assumed liabilities related to our AutoAnything operations.

As part of the sale, we retained the liability related to this lawsuit.

We are cooperating fully with the lawsuit and cannot predict the ultimate outcome of these efforts.

For the fiscal year ended August [removed: 26, 2017,][added: 25, 2018, or]

[removed: ][added: ]

| Title of each class | | Name of each [removed: exchange on] [added: exchange on] which registered |

Indicate by check mark whether the Registrant has submitted electronically [removed: and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] 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 [removed: and post] such files).

| Non-accelerated filer | | ☐ [removed: (Do not check if a smaller reporting company)] | | Smaller reporting company | | ☐ |

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was [removed: $20,972,678,680.][added: $19,597,989,296.]

The number of shares of Common Stock outstanding as of October [removed: 23, 2017,] [added: 22, 2018,] was [removed: 27,492,520.][added: 25,559,353.]

Portions of the definitive Proxy Statement to be filed within 120 days of August [removed: 26, 2017,] [added: 25, 2018,] pursuant to Regulation 14A under the Securities Exchange Act of 1934 for the Annual Meeting of Stockholders to be held December [removed: 20, 2017,] [added: 19, 2018,] are incorporated by reference into Part III.

| Item 1. | | [removed: [Business](#tx447746_2)] [added: [Business](#tx597971_2)] | | | [removed: 4] [added: 5] | |

| | | [Marketing and Merchandising [removed: Strategy](#tx447746_4)] [added: Strategy](#tx597971_4)] | | | [removed: 5] [added: 6] | |

| | | [Store [removed: Operations](#tx447746_6)] [added: Operations](#tx597971_6)] | | | [removed: 7] [added: 8] | |

| | | [Store [removed: Development](#tx447746_7)] [added: Development](#tx597971_7)] | | | [removed: 8] [added: 9] | |

| | | [Purchasing and Supply [removed: Chain](#tx447746_8)] [added: Chain](#tx597971_8)] | | | [removed: 8] [added: 9] | |

| | | [Trademarks and [removed: Patents](#tx447746_10)] [added: Patents](#tx597971_10)] | | | [removed: 9] [added: 10] | |

| | | [AutoZone [removed: Websites](#tx447746_12)] [added: Websites](#tx597971_12)] | | | [removed: 9] [added: 10] | |

| | | [Executive Officers of the [removed: Registrant](#tx447746_13)] [added: Registrant](#tx597971_13)] | | | [removed: 10] [added: 11] | |

| Item 1A. | | [Risk [removed: Factors](#tx447746_14)] [added: Factors](#tx597971_14)] | | | [removed: 12] [added: 13] | |

| Item 1B. | | [Unresolved Staff [removed: Comments](#tx447746_15)] [added: Comments](#tx597971_15)] | | | [removed: 18] [added: 19] | |

| Item 2. | | [removed: [Properties](#tx447746_16)] [added: [Properties](#tx597971_16)] | | | [removed: 18] [added: 19] | |

| Item 3. | | [Legal [removed: Proceedings](#tx447746_17)] [added: Proceedings](#tx597971_17)] | | | [removed: 18] [added: 19] | |

| Item 4. | | [Mine Safety [removed: Disclosures](#tx447746_18)] [added: Disclosures](#tx597971_18)] | | | [removed: 19] [added: 20] | |

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#tx447746_20)] [added: Securities](#tx597971_20)] | | | [removed: 20] [added: 21] | |

| Item 6. | | [Selected Financial [removed: Data](#tx447746_21)] [added: Data](#tx597971_21)] | | | [removed: 22] [added: 23] | |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#tx447746_22)] [added: Operations](#tx597971_22)] | | | [removed: 23] [added: 24] | |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#tx447746_23)] [added: Risk](#tx597971_23)] | | | 38 | |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#tx447746_24)] [added: Data](#tx597971_24)] | | | 40 | |

| Item 9. | | [Changes In and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#tx447746_25)] [added: Disclosure](#tx597971_25)] | | | [removed: 74] [added: 75] | |

| Item 9A. | | [Controls and [removed: Procedures](#tx447746_26)] [added: Procedures](#tx597971_26)] | | | 75 | |

| Item 9B. | | [Other [removed: Information](#tx447746_27)] [added: Information](#tx597971_27)] | | | 75 | |

| [PART [removed: III](#tx447746_28)] [added: III](#tx597971_28)] | | | | | 76 | |

| Item 10. | | [Directors, Executive Officers and Corporate [removed: Governance](#tx447746_29)] [added: Governance](#tx597971_29)] | | | 76 | |

| Item 11. | | [Executive [removed: Compensation](#tx447746_30)] [added: Compensation](#tx597971_30)] | | | 76 | |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#tx447746_31)] [added: Matters](#tx597971_31)] | | | 76 | |

| Item 13. | | [Certain Relationships and Related Transactions, and Director [removed: Independence](#tx447746_32)] [added: Independence](#tx597971_32)] | | | 76 | |

| Item 14. | | [Principal Accounting Fees and [removed: Services](#tx447746_33)] [added: Services](#tx597971_33)] | | | 76 | |

| Item 15. | | [Exhibits and Financial Statement [removed: Schedules](#tx447746_35)] [added: Schedules](#tx597971_35)] | | | 77 | |

Forward-looking statements typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” [removed: “strategy”] [added: “strategy,” “seek,” “may,” “could”] and similar expressions.

Certain of these risks are discussed in more detail in the “Risk Factors” section contained in Item 1A under Part 1 of this Annual Report on Form 10-K for the year ended August [removed: 26, 2017,] [added: 25, 2018,] and these Risk Factors should be read carefully.

Forward-looking statements are not guarantees of future performance and actual [removed: results;] [added: 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.

10-K 1 d597971d10k.htm FORM 10-K

| [PART I](#tx597971_1) | | | | | 5 | |

| | | [Introduction](#tx597971_3) | | | 5 | |

| | | [Commercial](#tx597971_5) | | | 8 | |

| | | [Competition](#tx597971_9) | | | 10 | |

| | | [Employees](#tx597971_11) | | | 10 | |

| [PART II](#tx597971_19) | | | | | 21 | |

| [PART IV](#tx597971_34) | | | | | 77 | |

| Item 16. | | [Form 10-K Summary](#tx597971_36) | | | 82 | |

Certain statements contained in this annual report constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

##### [Table of Contents](#toc)

10-K 1 d447746d10k.htm FORM 10-K

or

| [PART I](#tx447746_1) | | | | | 4 | |

| | | [Introduction](#tx447746_3) | | | 4 | |

| | | [Commercial](#tx447746_5) | | | 7 | |

| | | [Competition](#tx447746_9) | | | 9 | |

| | | [Employees](#tx447746_11) | | | 9 | |

| [PART II](#tx447746_19) | | | | | 20 | |

| [PART IV](#tx447746_34) | | | | | 77 | |

Certain statements contained in this annual report are forward-looking statements.

None.

None.

The following table reflects the square footage and number of leased and owned properties for our [removed: AutoZone] stores as of August [removed: 26, 2017:][added: 25, 2018:]

| | | No. of [removed: AZ] Stores | | | | [removed: AZ Store] [added: Store] Square Footage | | |

We have approximately [removed: 5.3] [added: 5.8] million square feet in distribution centers servicing our [removed: AutoZone] stores, of which approximately 1.8 million square feet is leased and the remainder is owned.

Our [removed: 11 AutoZone] [added: 12] distribution centers are located in Arizona, California, [added: Florida,] Georgia, Illinois, Ohio, Pennsylvania, Tennessee, Texas, Washington and two in Mexico.

We also have three additional [removed: AutoZone] store support centers located in Monterrey, Mexico; Chihuahua, Mexico and Sao Paulo, [removed: Brazil, and an IMC branch support center located in Canoga Park, California.][added: Brazil.]

The ALLDATA headquarters in Elk Grove, California [removed: and the AutoAnything headquarters space in San Diego, California are] [added: is] leased, and we also own or lease other properties that are not material in the aggregate.

| Leased | | | 3,251 | | | | 21,124,799 | |

| Owned | | | 2,951 | | | | 19,941,207 | |

| Total | | | 6,202 | | | | 41,066,006 | |

| Leased | | | 3,115 | | | | 20,177,795 | |

| Owned | | | 2,888 | | | | 19,506,505 | |

| Total | | | 6,003 | | | | 39,684,300 | |

We currently have one additional domestic distribution center under development.

Of our 26 IMC branches, 25 branches, consisting of 854,804 square feet, are leased, and one branch, consisting of approximately 23 thousand square feet, is owned.

Our common stock is listed on the New York Stock Exchange under the symbol “AZO.” On October [removed: 23, 2017,] [added: 22, 2018,] there were [removed: 2,347] [added: 2,233] stockholders of record, which does not include the number of beneficial owners whose shares were represented by security position listings.

| Fiscal Year [removed: Ended] [added: ended] August [removed: 27, 2016:] [added: 25, 2018:] | | | | | | | | |

The program was most recently amended on [removed: March 21, 2017,] [added: September 26, 2018] to increase the repurchase authorization by [removed: $750 million] [added: $1.25 billion,] bringing total value of authorized share repurchases to [removed: $18.65] [added: $20.9] billion.

Shares of common stock repurchased by the Company during the quarter ended August [removed: 26, 2017,] [added: 25, 2018,] were as follows:

| Period | | Total Number of Shares Purchased | | | | Average Price Paid per Share | | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | | Maximum [removed: Dollar Value] [added: Dollar Value] that [removed: May Yet] [added: May Yet] Be Purchased Under the Plans or Programs | | |

The Company also repurchased, at market value, an additional [added: 11,816,] 12,455 [removed: shares in fiscal 2017,] [added: and] 12,460 shares in fiscal [removed: 2016,] [added: years 2018, 2017] and [removed: 15,594 shares in fiscal 2015] [added: 2016, respectively,] from employees electing to sell their stock under the Company’s Sixth Amended and Restated Employee Stock Purchase Plan (the “Employee Plan”), qualified under Section 423 of the Internal Revenue Code, under which all eligible employees may purchase AutoZone’s common stock at 85% of the lower of the market price of the common stock on the first day or last day of each calendar quarter through payroll deductions.

Under the Employee Plan, [added: 14,523,] 14,205 [removed: shares were sold to employees in fiscal 2017, 12,662 shares in fiscal 2016,] and [removed: 14,222] [added: 12,662] shares were sold to employees in fiscal [removed: 2015.][added: 2018, 2017 and 2016, respectively.]

At August [removed: 26, 2017, 178,300] [added: 25, 2018, 163,777] shares of common stock were reserved for future issuance under the Employee Plan.

Purchases by executives under the Executive Plan were [added: 1,840,] 1,865 [removed: shares in fiscal 2017,] [added: and] 1,943 shares in fiscal [removed: 2016,] [added: 2018, 2017] and [removed: 2,229 shares in fiscal 2015.][added: 2016, respectively.]

At August [removed: 26, 2017, 239,888] [added: 25, 2018, 238,048] shares of common stock were reserved for future issuance under the Executive Plan.

The graph below presents changes in the value of AutoZone’s stock as compared to Standard & Poor’s 500 Composite Index (“S&P 500”) and to Standard & Poor’s Retail Index (“S&P Retail Index”) for the five-year period beginning August [removed: 25, 2012] [added: 31, 2013] and ending August [removed: 26, 2017.][added: 25, 2018.]

[removed: ][added: ]

| Fourth quarter | | $ | 771.37 | | | $ | 602.00 | |

| Third quarter | | $ | 735.90 | | | $ | 595.84 | |

| Second quarter | | $ | 796.95 | | | $ | 632.40 | |

| First quarter | | $ | 629.43 | | | $ | 522.38 | |

| May 6, 2018, to June 2, 2018 | | | 228,067 | | | $ | 646.72 | | | | 228,067 | | | $ | 749,051,559 | |

| June 3, 2018, to June 30, 2018 | | | 264,892 | | | | 676.58 | | | | 264,892 | | | | 569,831,573 | |

| July 1, 2018, to July 28, 2018 | | | 283,073 | | | | 691.25 | | | | 283,073 | | | | 374,157,362 | |

| July 29, 2018, to August 25, 2018 | | | 198,036 | | | | 719.41 | | | | 198,036 | | | | 231,688,900 | |

| Total | | | 974,068 | | | $ | 682.56 | | | | 974,068 | | | $ | 231,688,900 | |

| Fourth quarter | | $ | 815.98 | | | $ | 742.08 | |

| Third quarter | | $ | 805.40 | | | $ | 748.51 | |

| Second quarter | | $ | 796.09 | | | $ | 695.46 | |

| First quarter | | $ | 797.29 | | | $ | 714.37 | |

| May 7, 2017, to June 3, 2017 | | | 131,400 | | | $ | 689.21 | | | | 131,400 | | | $ | 960,606,233 | |

| June 4, 2017, to July 1, 2017 | | | 187,136 | | | | 597.99 | | | | 187,136 | | | | 848,701,210 | |

| July 2, 2017, to July 29, 2017 | | | — | | | | — | | | | — | | | | 848,701,210 | |

| July 30, 2017, to August 26, 2017 | | | 47,118 | | | | 530.57 | | | | 47,118 | | | | 823,701,893 | |

| Total | | | 365,654 | | | $ | 622.08 | | | | 365,654 | | | $ | 823,701,893 | |

| _(in thousands, except per share data, same store sales and [removed: selected_] [added: selected operating data)_] | | Fiscal Year Ended August | | | | | | | | | | | | | | | | | | |

| [removed: _operating data)_] | [added: 2018] | [added: | | |] 2017 | | | | 2016 | | | | 2015 | | | | 2014 | | | | [removed: 2013(1) | | |]

| Net sales | | $ | [removed: 10,888,676] [added: 11,221,077] | | | $ | [removed: 10,635,676] [added: 10,888,676] | | | $ | [removed: 10,187,340] [added: 10,635,676] | | | $ | [removed: 9,475,313] [added: 10,187,340] | | | $ | [removed: 9,147,530] [added: 9,475,313] | |

| Cost of sales, including warehouse and delivery expenses | | | [removed: 5,149,056] [added: 5,247,331] | | | | [removed: 5,026,940] [added: 5,149,056] | | | | [removed: 4,860,309] [added: 5,026,940] | | | | [removed: 4,540,406] [added: 4,860,309] | | | | [removed: 4,406,595] [added: 4,540,406] | |

| Gross profit | | | [removed: 5,739,620] [added: 5,973,746] | | | | [removed: 5,608,736] [added: 5,739,620] | | | | [removed: 5,327,031] [added: 5,608,736] | | | | [removed: 4,934,907] [added: 5,327,031] | | | | [removed: 4,740,935] [added: 4,934,907] | |

| Operating, selling, general and administrative [removed: expenses] [added: expenses(1)] | | | [removed: 3,659,551] [added: 4,162,890] | | | | [removed: 3,548,341] [added: 3,659,551] | | | | [removed: 3,373,980] [added: 3,548,341] | | | | [removed: 3,104,684] [added: 3,373,980] | | | | [removed: 2,967,837] [added: 3,104,684] | |

| Operating [removed: profit] [added: profit(1)] | | | [removed: 2,080,069] [added: 1,810,856] | | | | [removed: 2,060,395] [added: 2,080,069] | | | | [removed: 1,953,051] [added: 2,060,395] | | | | [removed: 1,830,223] [added: 1,953,051] | | | | [removed: 1,773,098] [added: 1,830,223] | |

| Interest expense, net | | | [removed: 154,580] [added: 174,527] | | | | [removed: 147,681] [added: 154,580] | | | | [removed: 150,439] [added: 147,681] | | | | [removed: 167,509] [added: 150,439] | | | | [removed: 185,415] [added: 167,509] | |

| Income before income taxes | | | [removed: 1,925,489] [added: 1,636,329] | | | | [removed: 1,912,714] [added: 1,925,489] | | | | [removed: 1,802,612] [added: 1,912,714] | | | | [removed: 1,662,714] [added: 1,802,612] | | | | [removed: 1,587,683] [added: 1,662,714] | |

| Income tax [removed: expense(2)] [added: expense(2)(3)] | | | [removed: 644,620] [added: 298,793] | | | | [removed: 671,707] [added: 644,620] | | | | [removed: 642,371] [added: 671,707] | | | | [removed: 592,970] [added: 642,371] | | | | [removed: 571,203] [added: 592,970] | |

| Net [removed: income(2)] [added: income(2)(3)] | | $ | [removed: 1,280,869] [added: 1,337,536] | | | $ | [removed: 1,241,007] [added: 1,280,869] | | | $ | [removed: 1,160,241] [added: 1,241,007] | | | $ | [removed: 1,069,744] [added: 1,160,241] | | | $ | [removed: 1,016,480] [added: 1,069,744] | |

| Diluted earnings per share(2) | | $ | [removed: 44.07] [added: 48.77] | | | $ | [removed: 40.70] [added: 44.07] | | | $ | [removed: 36.03] [added: 40.70] | | | $ | [removed: 31.57] [added: 36.03] | | | $ | [removed: 27.79] [added: 31.57] | |

| Weighted average shares for diluted earnings per share(2) | | | [removed: 29,065] [added: 27,424] | | | | [removed: 30,488] [added: 29,065] | | | | [removed: 32,206] [added: 30,488] | | | | [removed: 33,882] [added: 32,206] | | | | [removed: 36,581] [added: 33,882] | |

| Increase in domestic comparable store net [removed: sales(3)] [added: sales(4)] | | | [removed: 0.5] [added: 1.8] | % | | | [removed: 2.4] [added: 0.5] | % | | | [removed: 3.8] [added: 2.4] | % | | | [removed: 2.8] [added: 3.8] | % | | | [removed: 0.0] [added: 2.8] | % |

| Current assets | | $ | [removed: 4,611,255] [added: 4,635,869] | | | $ | [removed: 4,239,573] [added: 4,611,255] | | | $ | [removed: 3,970,294] [added: 4,239,573] | | | $ | [removed: 3,580,612] [added: 3,970,294] | | | $ | [removed: 3,278,013] [added: 3,580,612] | |

| Working capital (deficit) | | | [removed: (155,046] [added: (392,812] | ) | | | [removed: (450,747] [added: (155,046] | ) | | | [removed: (742,579] [added: (450,747] | ) | | | [removed: (960,482] [added: (742,579] | ) | | | [removed: (891,137] [added: (960,482] | ) |

| Total assets | | | [removed: 9,259,781] [added: 9,346,980] | | | | [removed: 8,599,787] [added: 9,259,781] | | | | [removed: 8,102,349] [added: 8,599,787] | | | | [removed: 7,497,163] [added: 8,102,349] | | | | [removed: 6,869,167] [added: 7,497,163] | |

| Current liabilities | | | [removed: 4,766,301] [added: 5,028,681] | | | | [removed: 4,690,320] [added: 4,766,301] | | | | [removed: 4,712,873] [added: 4,690,320] | | | | [removed: 4,541,094] [added: 4,712,873] | | | | [removed: 4,169,150] [added: 4,541,094] | |

| Debt | | | [removed: 5,081,238] [added: 5,005,930] | | | | [removed: 4,924,119] [added: 5,081,238] | | | | [removed: 4,624,876] [added: 4,924,119] | | | | [removed: 4,323,106] [added: 4,624,876] | | | | [removed: 4,164,078] [added: 4,323,106] | |

| Long-term capital leases | | | [removed: 102,322] [added: 102,013] | | | | [removed: 102,451] [added: 102,322] | | | | [removed: 87,639] [added: 102,451] | | | | [removed: 83,098] [added: 87,639] | | | | [removed: 73,925] [added: 83,098] | |

| Stockholders’ (deficit) | | | [removed: (1,428,377] [added: (1,520,355] | ) | | | [removed: (1,787,538] [added: (1,428,377] | ) | | | [removed: (1,701,390] [added: (1,787,538] | ) | | | [removed: (1,621,857] [added: (1,701,390] | ) | | | [removed: (1,687,319] [added: (1,621,857] | ) |

| Number of locations at beginning of year | | | [removed: 5,814] [added: 6,029] | | | | [removed: 5,609] [added: 5,814] | | | | [removed: 5,391] [added: 5,609] | | | | [removed: 5,201] [added: 5,391] | | | | [removed: 5,006] [added: 5,201] | |

| Acquired [removed: locations(4)] [added: locations(5)] | | | — | | | | — | | | | [removed: 17] [added: —] | | | | [removed: —] [added: 17] | | | | — | |

| New locations | | | [removed: 215] [added: 201] | | | | [removed: 205] [added: 215] | | | | [removed: 202] [added: 205] | | | | [removed: 190] [added: 202] | | | | [removed: 197] [added: 190] | |

| Closed locations | | | [removed: —] [added: 2] | | | | — | | | | [removed: 1] [added: —] | | | | [removed: —] [added: 1] | | | | [removed: 2] [added: —] | |

| Net new locations | | | [removed: 215] [added: 199] | | | | [removed: 205] [added: 215] | | | | [removed: 201] [added: 205] | | | | [removed: 190] [added: 201] | | | | [removed: 195] [added: 190] | |

| Relocated locations | | | [removed: 5] [added: 7] | | | | [removed: 6] [added: 5] | | | | [removed: 5] [added: 6] | | | | [removed: 8] [added: 5] | | | | [removed: 11] [added: 8] | |

| Number of locations at end of year | | | [removed: 6,029] [added: 6,202] | | | | [removed: 5,814] [added: 6,029] | | | | [removed: 5,609] [added: 5,814] | | | | [removed: 5,391] [added: 5,609] | | | | [removed: 5,201] [added: 5,391] | |

| AutoZone domestic commercial programs | | | [removed: 4,592] [added: 4,741] | | | | [removed: 4,390] [added: 4,592] | | | | [removed: 4,141] [added: 4,390] | | | | [removed: 3,845] [added: 4,141] | | | | [removed: 3,421] [added: 3,845] | |

| Inventory per location (in thousands) | | $ | [removed: 644] [added: 636] | | | $ | [removed: 625] [added: 644] | | | $ | [removed: 610] [added: 625] | | | $ | [removed: 582] [added: 610] | | | $ | [removed: 550] [added: 582] | |

| Total AutoZone store square footage (in thousands) | | | [removed: 39,684] [added: 41,066] | | | | [removed: 38,198] [added: 39,684] | | | | [removed: 36,815] [added: 38,198] | | | | [removed: 35,424] [added: 36,815] | | | | [removed: 34,076] [added: 35,424] | |

| Average square footage per AutoZone store | | | [removed: 6,611] [added: 6,621] | | | | [removed: 6,600] [added: 6,611] | | | | [removed: 6,587] [added: 6,600] | | | | [removed: 6,571] [added: 6,587] | | | | [removed: 6,552] [added: 6,571] | |

| Increase in AutoZone store square footage | | | [removed: 3.9] [added: 3.5] | % | | | [removed: 3.8] [added: 3.9] | % | | | [removed: 3.9] [added: 3.8] | % | | | [removed: 4.0] [added: 3.9] | % | | | [removed: 4.2] [added: 4.0] | % |

| Average net sales per AutoZone store (in thousands) | | $ | [removed: 1,756] [added: 1,778] | | | $ | [removed: 1,773] [added: 1,756] | | | $ | [removed: 1,761] [added: 1,773] | | | $ | [removed: 1,724] [added: 1,761] | | | $ | [removed: 1,736] [added: 1,724] | |

| Net sales per AutoZone store square foot | | $ | [removed: 266] [added: 269] | | | $ | [removed: 269] [added: 266] | | | $ | [removed: 268] [added: 269] | | | $ | [removed: 263] [added: 268] | | | $ | [removed: 265] [added: 263] | |

| Total employees at end of year (in thousands) | | | [removed: 87] [added: 89] | | | | [removed: 84] [added: 87] | | | | [removed: 81] [added: 84] | | | | [removed: 76] [added: 81] | | | | [removed: 71] [added: 76] | |

| Inventory [removed: turnover(5)] [added: turnover(7)] | | | [removed: 1.4x] [added: 1.3x] | | | | 1.4x | | | | 1.4x | | | | [removed: 1.5x] [added: 1.4x] | | | | [removed: 1.6x] [added: 1.5x] | |

| Accounts payable to inventory ratio | | | [removed: 107.4] [added: 111.8] | % | | | [removed: 112.8] [added: 107.4] | % | | | [removed: 112.9] [added: 112.8] | % | | | [removed: 114.9] [added: 112.9] | % | | | [removed: 115.6] [added: 114.9] | % |

| After-tax return on invested [removed: capital(6)] [added: capital(8)] | | | [removed: 29.9] [added: 32.1] | % | | | [removed: 31.3] [added: 29.9] | % | | | [removed: 31.2] [added: 31.3] | % | | | [removed: 32.1] [added: 31.2] | % | | | [removed: 32.9] [added: 32.1] | % |

| Adjusted debt to [removed: EBITDAR(7)] [added: EBITDAR(9)] | | | [removed: 2.6] [added: 2.5] | | | | [removed: 2.5] [added: 2.6] | | | | 2.5 | | | | 2.5 | | | | 2.5 | |

| Sold locations(6) | | | 26 | | | | — | | | | — | | | | — | | | | — | |

| _(1)_ | _Fiscal 2018 was negatively impacted by the pension termination charges of $130.3 million (pre-tax) recognized in the fourth quarter and asset impairments of $193.2 million (pre-tax) recognized in the second quarter of fiscal 2018. See “Note M – Sale of Assets” and “Note L – Pension and Savings Plans” of the Notes to Consolidated Financial Statements for more information._ |

| _(3)_ | _Fiscal 2018 includes a benefit to net income related to Tax Reform. See “Note D – Income Taxes” of the Notes to Consolidated Financial Statements for more information._ |

| _(6)_ | _26 IMC branches were sold on April 4, 2018. See “Note M – Sale of Assets” of the Notes to Consolidated Financial Statements for more information._ |

| --- | --- |

| | | | | | | | | | | | | | | | | | | | | |

| Adjusted diluted earnings per share(2) | | $ | 43.26 | | | $ | 40.70 | | | $ | 36.03 | | | $ | 31.57 | | | $ | 27.79 | |

| _(1)_ | _The fiscal year ended August 31, 2013 consisted of 53 weeks._ |

| | _the new standard increased diluted earnings per share for fiscal 2017 by $0.81, driven by a lower effective tax rate of 162 basis points, partially offset by a change to the dilutive outstanding shares calculation. Excluding the impact of excess tax benefits from option exercises, adjusted diluted earnings per share was $43.26. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations. We have applied the amendment relating to the presentation of the excess tax benefits on the Consolidated Statements of Cash Flows retrospectively. Prior period amounts for net cash provided by operating activities for all years presented above were restated to conform to the current period presentation._ |

| [Management’s Report on Internal Control Over Financial [removed: Reporting](#tx447746_36)] [added: Reporting](#tx597971_37)] | | | 41 | |

| [Reports of Independent Registered Public Accounting [removed: Firm](#tx447746_38)] [added: Firm](#tx597971_39)] | | | 42 | |

| [Consolidated Statements of [removed: Income](#tx447746_39)] [added: Income](#tx597971_40)] | | | [removed: 44] [added: 45] | |

| [Consolidated Statements of Comprehensive [removed: Income](#tx447746_40)] [added: Income](#tx597971_41)] | | | [removed: 44] [added: 45] | |

| [Consolidated Balance [removed: Sheets](#tx447746_41)] [added: Sheets](#tx597971_42)] | | | [removed: 45] [added: 46] | |

| [Consolidated Statements of Cash [removed: Flows](#tx447746_42)] [added: Flows](#tx597971_43)] | | | [removed: 46] [added: 47] | |

| [Consolidated Statements of Stockholders’ [removed: Deficit](#tx447746_43)] [added: Deficit](#tx597971_44)] | | | [removed: 47] [added: 48] | |

| [Notes to Consolidated Financial [removed: Statements](#tx447746_44)] [added: Statements](#tx597971_45)] | | | [removed: 48] [added: 49] | |

Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting as of August [removed: 26, 2017,] [added: 25, 2018,] the end of our fiscal year.

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of August [removed: 26, 2017.][added: 25, 2018.]

Ernst & Young LLP’s attestation report on the Company’s internal control over financial reporting as of August [removed: 26, 2017] [added: 25, 2018] is included in this Annual Report on Form 10-K.

On January [removed: 4, 2017,] [added: 3, 2018,] the Company submitted to the New York Stock Exchange the Annual CEO Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

The Company has filed, as exhibits to its Annual Report on Form 10-K for the fiscal year ended August [removed: 26, 2017,] [added: 25, 2018,] the certifications of its Principal Executive Officer and Principal Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

We have audited [removed: AutoZone,] [added: AutoZone] Inc.’s internal control over financial reporting as of August [removed: 26, 2017,] [added: 25, 2018,] based on criteria established in Internal [removed: Control—Integrated] [added: Control-Integrated] Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: 2013 framework] [added: (2013 framework)] (the [removed: “COSO criteria”).][added: COSO criteria).]

[removed: AutoZone, Inc.’s] [added: The Company’s] management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control [removed: over] [added: Over] Financial Reporting.

Our responsibility is to express an opinion on [removed: AutoZone, Inc.’s] [added: the Company’s] internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

In our opinion, AutoZone, Inc. [added: (the Company)] maintained, in all material respects, effective internal control over financial reporting as of August [removed: 26, 2017,] [added: 25, 2018,] based on the COSO [removed: criteria.][added: criteria.]

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United [removed: States),] [added: States) (PCAOB),] the consolidated balance sheets of AutoZone, Inc. as of August [removed: 26, 2017] [added: 25, 2018] and August [removed: 27, 2016,] [added: 26, 2017,] and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended August [removed: 26, 2017 of AutoZone, Inc.] [added: 25, 2018,] and [added: the related notes and] our report dated October [removed: 25, 2017] [added: 24, 2018,] expressed an unqualified opinion thereon.

[removed: |] /s/ Ernst & Young LLP [removed: |]

We have audited the accompanying consolidated balance sheets of AutoZone, Inc. [added: (the Company)] as of August [removed: 26, 2017] [added: 25, 2018] and August [removed: 27, 2016, and] [added: 26, 2017,] the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended August [removed: 26, 2017.][added: 25, 2018, and the related notes (collectively referred to as the “consolidated financial statements”).]

These financial statements are the responsibility of [removed: AutoZone, Inc.’s] [added: the Company’s] management.

Our responsibility is to express an opinion on [removed: these] [added: the Company’s] financial statements based on our audits.

We conducted our audits in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material [removed: misstatement.][added: misstatement, whether due to error or fraud.]

[removed: An audit includes] [added: Such procedures included] examining, on a test basis, evidence [removed: supporting] [added: regarding] the amounts and disclosures in the financial statements.

[removed: An audit] [added: Our audits] also [removed: includes assessing] [added: included evaluating] the accounting principles used and significant estimates made by management, as well as evaluating the overall [added: presentation of the] financial [removed: statement presentation.][added: statements.]

In our opinion, the [added: consolidated] financial statements [removed: referred to above] present fairly, in all material respects, the [removed: consolidated] financial position of [removed: AutoZone, Inc. as of] [added: the Company at] August [removed: 26, 2017] [added: 25, 2018] and August [removed: 27, 2016] [added: 26, 2017,] and the [removed: consolidated] results of its operations and its cash flows for each of the three years in the period ended August [removed: 26, 2017,] [added: 25, 2018,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United [removed: States), AutoZone, Inc.’s] [added: States) (PCAOB), the Company’s] internal control over financial reporting as of August [removed: 26, 2017,] [added: 25, 2018,] based on criteria established in Internal [removed: Control—Integrated] [added: Control-Integrated] Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [removed: 2013 framework] [added: (2013 framework)] and our report dated October [removed: 25, 2017] [added: 24, 2018,] expressed an unqualified opinion thereon.

| _(in thousands, except per share data)_ | | August [removed: 26, 2017] [added: 25, 2018] (52 weeks) | | | | August [removed: 27, 2016] [added: 26, 2017] (52 weeks) | | | | August [removed: 29, 2015] [added: 27, 2016] (52 weeks) | | |

| Net sales | | $ | [removed: 10,888,676] [added: 11,221,077] | | | $ | [removed: 10,635,676] [added: 10,888,676] | | | $ | [removed: 10,187,340] [added: 10,635,676] | |

| Cost of sales, including warehouse and delivery expenses | | | [removed: 5,149,056] [added: 5,247,331] | | | | [removed: 5,026,940] [added: 5,149,056] | | | | [removed: 4,860,309] [added: 5,026,940] | |

| Gross profit | | | [removed: 5,739,620] [added: 5,973,746] | | | | [removed: 5,608,736] [added: 5,739,620] | | | | [removed: 5,327,031] [added: 5,608,736] | |

| Operating, selling, general and administrative expenses | | | [removed: 3,659,551] [added: 4,162,890] | | | | [removed: 3,548,341] [added: 3,659,551] | | | | [removed: 3,373,980] [added: 3,548,341] | |

| Operating profit | | | [removed: 2,080,069] [added: 1,810,856] | | | | [removed: 2,060,395] [added: 2,080,069] | | | | [removed: 1,953,051] [added: 2,060,395] | |

| Interest expense, net | | | [removed: 154,580] [added: 174,527] | | | | [removed: 147,681] [added: 154,580] | | | | [removed: 150,439] [added: 147,681] | |

| Income before income taxes | | | [removed: 1,925,489] [added: 1,636,329] | | | | [removed: 1,912,714] [added: 1,925,489] | | | | [removed: 1,802,612] [added: 1,912,714] | |

| Income tax expense | | | [removed: 644,620] [added: 298,793] | | | | [removed: 671,707] [added: 644,620] | | | | [removed: 642,371] [added: 671,707] | |

| Net income | | $ | [removed: 1,280,869] [added: 1,337,536] | | | $ | [removed: 1,241,007] [added: 1,280,869] | | | $ | [removed: 1,160,241] [added: 1,241,007] | |

| Weighted average shares for basic earnings per share | | | [removed: 28,430] [added: 26,970] | | | | [removed: 29,889] [added: 28,430] | | | | [removed: 31,560] [added: 29,889] | |

| [Certifications](#tx597971_38) | | | 41 | |

Opinion on the Internal Control Over Financial Reporting

Basis for Opinion

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 Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting

October 24, 2018

Opinion on the Financial Statements

Basis for Opinion

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 Securities and Exchange Commission and the PCAOB.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1988.

October 24, 2018

| Net income | | $ | 1,337,536 | | | $ | 1,280,869 | | | $ | 1,241,007 | |

| Cash and cash equivalents | | $ | 217,824 | | | $ | 293,270 | |

| | | | 7,291,623 | | | | 6,873,193 | |

| | | | 4,218,400 | | | | 4,031,018 | |

| | | | 492,711 | | | | 617,508 | |

| | | $ | 9,346,980 | | | $ | 9,259,781 | |

| | | $ | 9,346,980 | | | $ | 9,259,781 | |

| _(in thousands)_ | | August 25, 2018 (52 weeks) | | | | August 26, 2017 (52 weeks) | | | | August 27, 2016 (52 weeks) | | |

| Net income | | $ | 1,337,536 | | | $ | 1,280,869 | | | $ | 1,241,007 | |

| Pension termination charges | | | 130,263 | | | | — | | | | — | |

| Asset impairment | | | 193,162 | | | | — | | | | — | |

| Proceeds from sale of assets | | | 35,279 | | | | — | | | | — | |

| Net income | | | | | | | | | | | | | | | 1,337,536 | | | | | | | | | | | | 1,337,536 | |

| Total other comprehensive income | | | | | | | | | | | | | | | | | | | 18,752 | | | | | | | | 18,752 | |

| Retirement of treasury shares | | | (1,512 | ) | | | (15 | ) | | | (60,500 | ) | | | (918,462 | ) | | | | | | | 978,977 | | | | — | |

| Adoption of ASU 2018-02 | | | | | | | | | | | | | | | 14,489 | | | | | | | | | | | | 14,489 | |

| Balance at August 25, 2018 | | | 27,530 | | | $ | 275 | | | $ | 1,155,426 | | | $ | (1,208,824 | ) | | $ | (235,805 | ) | | $ | (1,231,427 | ) | | $ | (1,520,355 | ) |

Intangible Assets: Intangible assets consist of customer relationships purchased relating to ALLDATA operations.

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2018-05, _Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No._ _118_.

ASU 2018-05 provides guidance on accounting for the tax effects of the U.S. Tax Cuts and Jobs Act (“Tax Reform”) pursuant to the Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under Accounting Standard Codificiation (“ASC”) 740 within a one-year measurement period from Tax Reform enactment date, which occurred for the purposes of the Company’s financial statements during the quarter ended February 10, 2018, when the necessary information is not available, prepared, or analyzed in sufficient detail to complete the accounting.

The Company has applied this amendment.

Refer to “Note D – Income Taxes” in the Consolidated Financial Statements for more information.

In February 2018, the FASB issued ASU 2018-02, _Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax effects from Accumulated Other Comprehensive Income_, which allows for the reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the tax effects on deferred tax items included within AOCI (referred to in the ASU as “stranded tax effects”) resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% that was effected by the 2017 U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”).

ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.

The Company early adopted ASU 2018-02 in the fourth quarter of fiscal 2018, resulting in a $14.5 million reclassification from accumulated other comprehensive income to retained deficit on the Consolidated Balance Sheets and a decrease in the Consolidated Statement of Comprehensive Income.

This ASU, along with subsequent ASU’s issued to clarify certain provisions of ASU 2014-09, is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.

Companies that transition to this new standard may either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at the date of adoption.

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October 25, 2017

| | | | | | | | | |

| | | | 6,873,193 | | | | 6,330,115 | |

| | | | 4,031,018 | | | | 3,733,254 | |

| | | | 617,508 | | | | 626,960 | |

| Acquisition of business, net of cash | | | — | | | | — | | | | (75,744 | ) |

| Cash and cash equivalents at beginning of year | | | 189,734 | | | | 175,309 | | | | 124,485 | |

| Balance at August 30, 2014 | | | 33,858 | | | $ | 339 | | | $ | 843,504 | | | $ | (1,529,123 | ) | | $ | (128,903 | ) | | $ | (807,674 | ) | | $ | (1,621,857 | ) |

| Net income | | | | | | | | | | | | | | | 1,160,241 | | | | | | | | | | | | 1,160,241 | |

| Total other comprehensive loss | | | | | | | | | | | | | | | | | | | (120,615 | ) | | | | | | | (120,615 | ) |

| Retirement of treasury shares | | | (2,125 | ) | | | (21 | ) | | | (57,403 | ) | | | (1,049,856 | ) | | | | | | | 1,107,280 | | | | — | |

| Income tax benefit from exercise of stock options | | | | | | | | | | | 47,895 | | | | | | | | | | | | | | | | 47,895 | |

IMC branches carry an extensive line of original equipment quality import replacement parts.

Certain reclassifications have been made to the prior years’ Consolidated Statements of Cash Flows to conform to the current year’s presentation due to the adoption of the new accounting guidance for share-based payments.

The Company intends to continue to permanently reinvest the cash held outside of the U.S. in its foreign operations.

There were no material impairment losses recorded in the three years ended August 26, 2017.

The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments.

Intangible Assets: Intangible assets consist of assets from the acquisitions of IMC and AutoAnything and assets purchased relating to ALLDATA operations, and include technology, non-compete agreements, customer relationships and trade names.

Trade names are non-amortizing intangibles as their lives are indefinite.

These non-amortizing assets are reviewed at least annually for impairment by comparing the carrying amount to fair value.