Overview

We are the nation's leading retailer, and a leading distributor, of automotive replacement parts and accessories in the United States. We began operations in 1979 and at May 5, 2012, operated 4,613 stores in the United States, including Puerto Rico, and 297 in Mexico. Each of our stores 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 May 5, 2012, in 2,946 of our domestic stores, we also have 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 have commercial programs in select stores in Mexico as well. We also sell the ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com. Additionally, we sell automotive hard parts, maintenance items, accessories, and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com. We do not derive revenue from automotive repair or installation services.

Operating results for the twelve and thirty-six weeks ended May 5, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending August 25, 2012. Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarters for fiscal 2011 and fiscal 2012 each have 16 weeks. Our business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September and the lowest sales generally occurring in the months of December and January.

Executive Summary

Net sales were up 6.7% for the quarter, driven by domestic same store sales growth of 3.9%. We experienced sales growth from both our retail and commercial customers. Earnings per share increased 18.6% for the quarter.

Over the past several years, various factors have occurred within the economy that affect both our consumer and our industry, including the impact of the recession, continued high unemployment and other challenging economic conditions, which we believe have aided our sales growth during the quarter. As consumers' cash flows have decreased due to these factors, we believe consumers have become more likely to keep their current vehicles longer and perform repair and maintenance in order to keep those vehicles well maintained. Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends will continue, nor can we predict to what degree these trends will impact us in the future.

More recently, we feel other macroeconomic factors have adversely impacted both our consumer and our industry. During the third quarter of fiscal 2012, the price per gallon of unleaded gasoline in the United States remained at a high level beginning the quarter at $3.52 per gallon and increasing to $3.79 per gallon. During the prior year, gas prices began the quarter at $3.14 per gallon and increased to $3.97 per gallon. While we have seen recent declines in gas prices as compared to the comparable prior year period, we continue to believe gas prices remain at overall high levels, thereby reducing discretionary spending for all consumers, and, in particular, our customers. Given the unpredictability of gas prices, we cannot predict whether gas prices will increase or decrease, nor can we predict how any future changes in gas prices will impact our sales in future periods.

Our primary response to fluctuations in the demand for the products we sell are to adjust our inventory levels, store staffing, and advertising messages. We continue to believe we are well positioned to help our customers save money and meet their needs in a challenging macro environment.

Historically, the two statistics that we believed had the closest correlation to our market growth over the long-term were miles driven and the number of seven year old or older vehicles on the road. While over the long-term, we have seen a close correlation between our net sales and the number of miles driven, we have also seen short time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including the number of seven year old or older vehicles on the road. Since the beginning of fiscal year 2011 and through March 2012 (latest publicly available information), miles driven have decreased slightly as compared to the corresponding prior period. However, during the first quarter of calendar 2012, miles driven improved by 1.4% as compared to the prior year period. The average age of the U.S. light vehicle fleet continues to trend in our industry's favor. We believe that annual miles driven will continue to improve to a low single digit growth rate over time and that the number of seven year old or older vehicles will continue to increase; however, we are unable to predict the impact, if any, these indicators will have on future results.

During the third quarter, we believe that weather had an impact on the mix of products that we sold. Typically, our third quarter benefits from increased sales of maintenance items. However, this category experienced a slight decrease as a percentage of total product mix as compared to the prior year. We believe traditional maintenance jobs were shifted into January and February as a result of the milder than normal winter. We remain focused on refining and expanding our product assortment to ensure we have the best merchandise at the right price in each of our categories.

Twelve Weeks Ended May 5, 2012,

Compared with Twelve Weeks Ended May 7, 2011

Net sales for the twelve weeks ended May 5, 2012, increased $133.5 million to $2.112 billion, or 6.7%, over net sales of $1.978 billion for the comparable prior year period. Total auto parts sales increased by 6.7%, primarily driven by a domestic same store sales (sales for stores open at least one year) increase of 3.9% and net sales of $53.9 million from new stores. The domestic same store sales increase was driven by higher transaction value, partially offset by decreased transaction counts. Higher transaction value is attributable to product inflation due to more complex, costly products and commodity price increases.

Gross profit for the twelve weeks ended May 5, 2012, was $1.090 billion, or 51.6% of net sales, compared with $1.014 billion, or 51.2% of net sales, during the comparable prior year period. The improvement in gross profit was primarily attributable to leveraging distribution costs due to higher sales (25 basis points) and lower shrink expense.

Operating, selling, general and administrative expenses for the twelve weeks ended May 5, 2012, were $662.5 million, or 31.4% of net sales, compared with $620.6 million, or 31.4% of net sales, during the comparable prior year period. During the quarter, operating expenses, as a percentage of sales, were favorably impacted by lower incentive compensation (31 basis points), which was partially offset by higher self-insurance costs (23 basis points).

Net interest expense for the twelve weeks ended May 5, 2012, was $39.7 million compared with $39.9 million during the comparable prior year period. This decrease was primarily due to a decrease in borrowing rates, offset by the increase in debt over the comparable prior year period. Average borrowings for the twelve weeks ended May 5, 2012, were $3.489 billion, compared with $3.219 billion for the comparable prior year period. Weighted average borrowing rates were 4.7% for the twelve weeks ended May 5, 2012, and 5.0% for the twelve weeks ended May 7, 2011.

Our effective income tax rate was 35.8% of pretax income for the twelve weeks ended May 5, 2012, and 35.6% for the comparable prior year period.

Net income for the twelve week period ended May 5, 2012, increased by $21.2 million to $248.6 million, and diluted earnings per share increased by 18.6% to $6.28 from $5.29 in the comparable prior year period. The impact on current quarter diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $0.47.

Thirty-Six Weeks Ended May 5, 2012,

Compared with Thirty-Six Weeks Ended May 7, 2011

Net sales for the thirty-six weeks ended May 5, 2012, increased $409.3 million to $5.840 billion, or 7.5% over net sales of $5.431 billion for the comparable prior year period. Total auto parts sales increased by 7.5%, primarily driven by an increase in domestic comparable same store sales of 4.7% and net sales of $148.5 million from new stores. The domestic same store sales increase was driven by higher transaction value partially offset by decreased transaction counts.

Gross profit for the thirty-six weeks ended May 5, 2012, was $3.000 billion, or 51.4% of net sales, compared with $2.767 billion, or 50.9% of net sales, during the comparable prior year period. The improvement in gross margin was primarily attributable to lower shrink expense (24 basis points) and leveraging distribution costs due to higher sales (22 basis points).

Operating, selling, general and administrative expenses for the thirty-six weeks ended May 5, 2012, were $1.931billion, or 33.1% of net sales, compared with $1.796 billion, or 33.1% of net sales, during the comparable prior year period. The slight improvement in operating expenses was due to lower incentive compensation (25 basis points), favorable legal expense (14 basis points) and leverage from higher sales volumes, partially offset by higher self insurance costs (45 basis points).

Net interest expense for the thirty-six weeks ended May 5, 2012, was $117.8 million compared with $116.7 million during the comparable prior year period. This increase was primarily due to the increase in debt over the comparable prior year period, partially offset by a decline in borrowing rates. Average borrowings for the thirty-six weeks ended May 5, 2012, were $3.401 billion, compared with $3.075 billion for the comparable prior year period. Weighted average borrowing rates were 4.7% for the thirty-six weeks ended May 5, 2012, and 5.1% for the thirty-six weeks ended May 7, 2011.

Our effective income tax rate was 36.2% of pretax income for the thirty-six weeks ended May 5, 2012, and 35.9% for the comparable prior year period.

Net income for the thirty-six week period ended May 5, 2012, increased by $59.1 million to $606.6 million, and diluted earnings per share increased by 22.1% to $15.08 from $12.35 in the comparable prior year period. The impact on year to date diluted earnings per share from stock repurchases since the end of the comparable prior year period was an increase of $0.87.

Liquidity and Capital Resources

The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products and accessories. For the thirty-six weeks ended May 5, 2012, our net cash flows from operating activities provided $798.6 million as compared with $896.9 million provided during the comparable prior year period. The decrease is primarily due to the change in inventories net of payables.

Our net cash flows from investing activities for the thirty-six weeks ended May 5, 2012, used $226.2 million as compared with $200.9 million used in the comparable prior year period. Capital expenditures for the thirty-six weeks ended May 5, 2012, were $228.3 million compared to $200.6 million for the comparable prior year period. The increase is primarily driven by a shift in the mix in types of stores opened and increased investment in our hub initiative. Investing cash flows were also impacted by our wholly owned insurance captive, which purchased $34.1 million and sold $30.3 million in marketable securities during the thirty-six weeks ended May 5, 2012. During the comparable prior year period, the captive purchased $34.7 million in marketable securities and sold $32.1 million in marketable securities. Capital asset disposals and other provided $5.9 million during the thirty-six week period ended May 5, 2012, and $2.3 million in the comparable prior year period.

Our net cash flows from financing activities for the thirty-six weeks ended May 5, 2012, used $566.6 million compared to $694.7 million used in the comparable prior year period. During the thirty six weeks ended May 5, 2012, we received $500.0 million in proceeds from the issuance of debt. The proceeds were used for the repayment of a portion of commercial paper borrowings and general corporate purposes. During the comparable prior year, proceeds from the issuance of debt totaled $500.0 million. Those proceeds were used for the repayment of debt of $199.3 million, the repayment of a portion of our commercial paper borrowings, and general corporate purposes. For the thirty-six weeks ended May 5, 2012, net payments of commercial paper and short-term borrowings were $243.4 million as compared to proceeds from net borrowings of $7.8 million in the comparable prior year period. Stock repurchases were $882.7 million in the current thirty-six week period as compared with $1.033 billion in the comparable prior year period. For the thirty-six weeks ended May 5, 2012, proceeds from the sale of common stock and exercises of stock options provided $87.8 million, including $37.3 million in related tax benefits. In the comparable prior year period, proceeds from the sale of common stock and exercises of stock options provided $64.2 million, including $22.0 million in related tax benefits.

During fiscal 2012, we expect to invest in our business at an increased rate as compared to fiscal 2011. Our investment is expected to be directed primarily to our new-store development program and enhancements to existing stores and infrastructure. The amount of our investments in our new-store program is impacted by different factors, including such factors as whether the building and land are purchased (requiring higher investment) or leased (generally lower investment), located in the United States or Mexico, or located in urban or rural areas. During fiscal 2011 and fiscal 2010, our capital expenditures increased by approximately 2% and 16%, respectively, as compared to the prior year, and we expect our capital expenditures for fiscal 2012 to increase by 15% to 20% as compared to fiscal 2011. Our mix of store openings has moved away from build-to-suit leases (lower initial capital investment) to ground leases and land purchases (higher initial capital investment), resulting in increased capital expenditures per store during recent years. We expect this trend to continue during the remainder of the fiscal year ending August 25, 2012.

In addition to the building and land costs, our new-store development program requires working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio. Accounts payable, as a percent of gross inventory, finished the quarter at 109%, flat with last year's third quarter. We plan to continue leveraging our inventory purchases; however, our ability to do so may be limited by our vendors' capacity to factor their receivables from us. Certain vendors participate in financing arrangements with financial institutions whereby they factor their receivables from us, allowing them to receive payment on our invoices at a discounted rate.

Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance may be funded through new borrowings. We anticipate that we will be able to obtain such financing in view of our current credit ratings and favorable experiences in the debt markets in the past.

For the trailing four quarters ended May 5, 2012, our after-tax return on invested capital ("ROIC") was 32.7% as compared to 30.2% for the comparable prior year period. ROIC is calculated as after-tax operating profit (excluding rent charges) divided by average invested capital (which includes a factor to capitalize operating leases). ROIC increased primarily due to increased after-tax operating profit. We use ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance.

Debt Facilities

In September 2011, we amended and restated our $800 million revolving credit facility, which was scheduled to expire in July 2012. The capacity under the revolving credit facility was increased to $1.0 billion. 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 $1.250 billion prior to the maturity date at our election and subject to bank credit capacity and approval, may include up to $200 million in letters of credit, and may include up to $175 million in capital leases each fiscal year. Under the revolving credit facility, we may borrow funds consisting of Eurodollar loans or base rate loans. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as the London InterBank Offered Rate ("LIBOR") plus the applicable percentage, as defined in the revolving credit facility, depending upon our senior, unsecured, (non-credit enhanced) long-term debt rating. Interest accrues on base rate loans as defined in the revolving credit facility. We also have the option to borrow funds under the terms of a swingline loan subfacility. The revolving credit facility expires in September 2016.

As the available balance is reduced by commercial paper borrowings and certain outstanding letters of credit, we had $619.3 million in available capacity under our $1.0 billion credit facility at May 5, 2012.

We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of $100 million. The letter of credit facility is in addition to the letters of credit that may be issued under the revolving credit facility. As of May 5, 2012, we have $98.7 million in letters of credit outstanding under the letter of credit facility, which expires in June 2013.

On April 24, 2012, we issued $500 million in 3.700% Senior Notes due April 2022 under our shelf registration statement filed with the Securities and Exchange Commission on April 17, 2012 (the "Shelf Registration"). The Shelf Registration allows us to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. Proceeds from the debt issuance on April 24, 2012, were used to repay a portion of the commercial paper borrowings and for general corporate purposes. On November 15, 2010, we issued $500 million in 4.000% Senior Notes due 2020 under a shelf registration statement filed with the Securities and Exchange Commission on July 29, 2008. We used the proceeds from the November 15, 2010 issuance of debt to repay the principal due relating to the 4.750% Senior Notes that matured on November 15, 2010, to repay a portion of the commercial paper borrowings and for general corporate purposes.

The 6.500% and 7.125% Senior Notes issued during August 2008, and the 5.750% Senior Notes issued in July 2009, are subject to an interest rate adjustment if the debt ratings assigned to the notes are downgraded. These notes, along with the 3.700% Senior Notes issued in April 2012 and the 4.000% Senior Notes issued in November 2010, also contain a provision that repayment of the notes may be accelerated if AutoZone experiences a change in control (as defined in the agreements). Our borrowings under our other senior notes contain minimal covenants, primarily restrictions on liens. Under our other borrowing arrangements, covenants include limitations on total indebtedness, restrictions on liens, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances. All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs. As of May 5, 2012, we were in compliance with all covenants and expect to remain in compliance with all covenants.

Our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based expense ("EBITDAR") ratio was 2.5:1 as of May 5, 2012, and was 2.4:1 as of May 7, 2011. We calculate adjusted debt as the sum of total debt, capital lease obligations and rent times six; and we calculate EBITDAR by adding interest, taxes, depreciation, amortization, rent and share-based expenses to net income. Adjusted debt to EBITDAR is calculated on a trailing four quarter basis. We target our debt levels to a ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings. We believe this is important information for the management of our debt levels.

Stock Repurchases

From January 1, 1998 to May 5, 2012, we have repurchased a total of 129.9 million shares at an aggregate cost of $11.1 billion, including 2,510,029 shares of our common stock at an aggregate cost of $882.7 million during the thirty-six week period ended May 5, 2012. On March 7, 2012, the Board voted to increase the authorization by $750 million to raise the cumulative share repurchase authorization from $11.15 billion to $11.9 billion. Considering cumulative repurchases as of May 5, 2012, we have $835.9 million remaining under the Board's authorization to repurchase our common stock. Subsequent to May 5, 2012, we have repurchased 893,910 shares of our common stock at an aggregate cost of $335.5 million.

Off-Balance Sheet Arrangements

Since our fiscal year end, we have cancelled, issued and modified stand-by letters of credit that are primarily renewed on an annual basis to cover deductible payments to our casualty insurance carriers. Our total stand-by letters of credit commitment at May 5, 2012, was $102.3 million compared with $96.6 million at August 27, 2011, and our total surety bonds commitment at May 5, 2012, was $32.7 million compared with $26.3 million at August 27, 2011.

Financial Commitments

As of May 5, 2012, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 27, 2011.

Reconciliation of Non-GAAP Financial Measures

Management's Discussion and Analysis of Financial Condition and Results of Operations include certain financial measures not derived in accordance with U.S. generally accepted accounting principles ("GAAP"). These non-GAAP financial measures provide additional information for determining our optimum capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders' value.

Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented the non-GAAP financial measures, as we believe they provide additional information that is useful to investors. Furthermore, our management and the Compensation Committee of the Board use the abovementioned non-GAAP financial measures to analyze and compare our underlying operating results and to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables.

Reconciliation of Non-GAAP Financial Measure: After-Tax Return on Invested Capital "ROIC"

The following tables calculate the percentages of ROIC for the trailing four quarters ended May 5, 2012 and May 7, 2011.

                                                       A                   B                A-B=C                D                   C+D
                                                                                           Sixteen           Thirty-Six         Trailing Four
                                                  Fiscal Year         Thirty-Six            Weeks              Weeks              Quarters
                                                     Ended            Weeks Ended           Ended              Ended                Ended
                                                   August 27,           May  7,           August 27,          May  5,              May 5,
(in thousands, except percentage)                     2011               2011                2011               2012                2012
Net income                                        $    848,974       $     547,505       $    301,469       $    606,641       $       908,110
Adjustments:
Interest expense                                       170,557             116,745             53,812            117,760               171,572
Rent expense                                           213,846             147,252             66,594            158,109               224,703
Tax effect(1)                                         (138,792 )           (95,318 )          (43,474 )          (99,605 )            (143,079 )

After-tax return                                  $  1,094,585       $     716,184       $    378,401       $    782,905       $     1,161,306

Average debt(2)                                                                                                                $     3,399,491
Average deficit(3)                                                                                                                  (1,286,645 )
Rent x 6(4)                                                                                                                          1,348,218
Average capital lease obligations(5)                                                                                                    92,181

Pre-tax invested capital                                                                                                       $     3,553,245

ROIC                                                                                                                                      32.7 %


                                                       A                   B                A-B=C                D                   C+D
                                                                                           Sixteen           Thirty-Six         Trailing Four
                                                  Fiscal Year         Thirty-Six            Weeks              Weeks              Quarters
                                                     Ended            Weeks Ended           Ended              Ended                Ended
                                                   August 28,           May  8,           August 28,          May  7,              May 7,
(in thousands, except percentage)                     2010               2010                2010               2011                2011
Net income                                        $    738,311       $     469,378       $    268,933       $    547,505       $       816,438
. . .