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 February 9, 2013, operated 4,735 stores in the United States, including Puerto Rico; 334 in Mexico; and one in Brazil. 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 February 9, 2013, in 3,146 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 www.autoanything.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 twenty-four weeks ended February 9, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2013. Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarter for fiscal 2012 had 16 weeks and for fiscal 2013 has 17 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 2.8% for the quarter, driven by new store growth and increased number of commercial programs, partially offset by the domestic same store sales decrease of 1.8%. Earnings per share increased 15.1% 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. Although we have seen a recent increase in new vehicle sales, we believe our consumers' cash flows continue to decrease due to these factors. 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.

We believe other macroeconomic factors have adversely impacted both our consumer and our industry. During the second quarter of fiscal 2013, the price per gallon of unleaded gasoline in the United States began the quarter at $3.43 per gallon and ended the quarter at $3.61 per gallon, an $0.18 increase. During the comparable prior year period, gas prices increased by $0.15 per gallon during the second quarter, beginning at $3.37 per gallon and ending at $3.52 per gallon. With gas prices remaining at these overall higher levels, we continue to believe gas prices have an impact on our customers' abilities to maintain their vehicles, allowing us to communicate through our marketing messages the steps needed to improve their gas mileage. 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.

Additional key macroeconomic factors facing our customers during the second quarter of fiscal 2013 were the delayed processing of income tax refunds and the reinstitution of payroll taxes back to historic levels. We believe a factor that impacted sales during the second quarter of fiscal 2013 was the delay in the processing of income tax refunds. Historically, our sales have increased in the last two weeks of our fiscal second quarter. Conversely, domestic same store sales decreased 8% in the last two weeks of the second quarter of fiscal 2013. We expect a similar amount of dollars in total will be refunded this year as compared to last year and that we will see more normalized sales volumes during the third quarter. The reduction in our customers' take home pay as a result of the recent increase in payroll taxes was effective at the beginning of the 2013 calendar year and, at this point, we cannot predict the impact this change will have on our sales in future periods.

Our primary responses to fluctuations in the demand for the products we sell are to adjust our inventory levels, store staffing, and advertising level and 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 certain 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. From January 2012 through November 2012, miles driven have increased by 0.6% over last year. 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 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 second quarter of fiscal 2013, 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 be our strongest performers. While we have not experienced any fundamental shifts in our category sales mix as compared to previous years, we did experience a slight decline in mix of sales of the maintenance category. We believe the slowdown in maintenance related products continues to be largely due to weather related impacts in various regions of the U.S. Because of the unusually mild winter last year across parts of the U.S., we saw a reduced benefit from sales of maintenance related products compared to the prior fiscal year. We believe that we will see improvement in sales once we annualize the effects of the mild winter, however, we remain focused on refining and expanding our product assortment to ensure that we have the best merchandise at the right price in each of our categories.

Effective December 2012, we acquired certain assets and liabilities of AutoAnything, an online retailer of specialized automotive products for up to $150 million, including an initial cash payment of $115 million, a $5 million holdback payment for working capital true-ups, and contingent payments not to exceed $30 million. With this acquisition, we expect to bolster our online presence in the high-end, automotive accessory and performance markets. The results of operations from AutoAnything have been included in our Other business activities since the date of acquisition. The purchase price allocation resulted in goodwill of $83.3 million and intangible assets totaling $58.8 million. Goodwill generated from the acquisition is tax deductible and is primarily attributable to expected synergies and the assembled workforce. The contingent consideration is based on the achievement of certain performance metrics through calendar year 2014 with any earned payments due during the first calendar quarter of 2014 and 2015. The fair value of the contingent consideration as of the acquisition date was $22.7 million.

Twelve Weeks Ended February 9, 2013,

Compared with Twelve Weeks Ended February 11, 2012

Net sales for the twelve weeks ended February 9, 2013, increased $51.1 million to $1.855 billion, or 2.8%, over net sales of $1.804 billion for the comparable prior year period. Total auto parts sales increased by 1.9%, primarily driven by net sales of $49.1 million from new stores and increased number of commercial programs, partially offset by domestic same store sales decrease of 1.8%.

Gross profit for the twelve weeks ended February 9, 2013, was $962.0 million, or 51.9% of net sales, compared with $926.2 million, or 51.3% of net sales, during the comparable prior year period. The improvement in gross margin was primarily driven by lower acquisition costs.

Operating, selling, general and administrative expenses for the twelve weeks ended February 9, 2013, were $644.4 million, or 34.7% of net sales, compared with $625.6 million, or 34.7% of net sales, during the comparable prior year period. Operating expenses, as a percentage of sales, increased slightly due to the lower sales growth rates, partially offset by lower incentive compensation (47 basis points).

Net interest expense for the twelve weeks ended February 9, 2013, was $41.3 million compared with $38.9 million during the comparable prior year period. The increase was primarily due to an increase in debt, partially offset by a decrease in borrowing rates over the comparable prior year period. Average borrowings for the twelve weeks ended February 9, 2013, were $3.948 billion, compared with $3.428 billion for the comparable prior year period. Weighted average borrowing rates were 4.3% for the twelve weeks ended February 9, 2013, and 4.7% for the twelve weeks ended February 11, 2012.

Our effective income tax rate was 36.2% of pretax income for the twelve weeks ended February 9, 2013 and for the comparable prior year period.

Net income for the twelve week period ended February 9, 2013, increased by $9.3 million to $176.2 million, and diluted earnings per share increased by 15.1% to $4.78 from $4.15 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 $0.39.

Twenty-Four Weeks Ended February 9, 2013,

Compared with Twenty-Four Weeks Ended February 11, 2012

Net sales for the twenty-four weeks ended February 9, 2013, increased $117.8 million to $3.846 billion, or 3.2%, over net sales of $3.728 billion for the comparable prior year period. Total auto parts sales increased by 2.7%, primarily driven by net sales of $98.9 million from new stores, increased number of commercial programs, partially offset by a domestic same store sales (sales for stores open at least one year) decrease of 0.7%.

Gross profit for the twenty-four weeks ended February 9, 2013, was $1.994 billion, or 51.8% of net sales, compared with $1.910 billion, or 51.2% of net sales, during the comparable prior year period. The improvement in gross margin was due to favorable merchandise margins (50 basis points) primarily driven by lower acquisition costs and lower shrink expense (11 basis points).

Operating, selling, general and administrative expenses for the twenty-four weeks ended February 9, 2013, were $1.313 billion, or 34.1% of net sales, compared with $1.268 billion, or 34.0% of net sales, during the comparable prior year period. Operating expenses, as a percentage of sales, increased due to the lower sales growth rates, partially offset by lower incentive compensation (31 basis points).

Net interest expense for the twenty-four weeks ended February 9, 2013, was $82.4 million compared with $78.0 million during the comparable prior year period. The increase was primarily due to an increase in debt, partially offset by a decrease in borrowing rates over the comparable prior year period. Average borrowings for the twenty-four weeks ended February 9, 2013, were $3.845 billion, compared with $3.357 billion for the comparable prior year period. Weighted average borrowing rates were 4.4% for the twenty-four weeks ended February 9, 2013, and 4.8% for the twenty-four weeks ended February 11, 2012.

Our effective income tax rate was 36.5% of pretax income for the twenty-four weeks ended February 9, 2013 and for the comparable prior year period.

Net income for the twenty-four week period ended February 9, 2013, increased by $21.6 million to $379.7 million, and diluted earnings per share increased by 15.5% to $10.19 from $8.83 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 $0.75.

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 twenty-four weeks ended February 9, 2013, our net cash flows from operating activities provided $510.8 million as compared with $461.2 million provided during the comparable prior year period. The increase is primarily due to the timing of tax payments, increased net income, and the change in inventories, net of payables.

Our net cash flows from investing activities for the twenty-four weeks ended February 9, 2013, used $289.8 million as compared with $129.2 million used in the comparable prior year period. Capital expenditures for the twenty-four weeks ended February 9, 2013, were $169.6 million compared to $132.4 million for the comparable prior year period. The increase is primarily driven by an increase in the number of purchased stores as compared to leased stores, the timing of new store openings, and spend for future store openings. During the twenty-four week period ended February 9, 2013, we opened 64 net new stores. In the comparable prior year period, we opened 54 net new stores. Cash flows used in the acquisition of AutoAnything were $115 million during the twenty-four week period ended February 9, 2013. Investing cash flows were also impacted by our wholly owned insurance captive, which purchased $22.3 million and sold $16.2 million in marketable securities during the twenty-four weeks ended February 9, 2013. During the comparable prior year period, the captive purchased $19.0 million in marketable securities and sold $16.4 million in marketable securities. Capital asset disposals and other provided $0.9 million during the twenty-four week period ended February 9, 2013, and $5.8 million in the comparable prior year period.

Our net cash flows from financing activities for the twenty-four weeks ended February 9, 2013, used $209.1 million compared to $326.3 million used in the comparable prior year period. During the twenty-four weeks ended February 9, 2013, we received $300.0 million in proceeds from the issuance of debt; there were no proceeds from the issuance of debt during the comparable prior year period. The proceeds in the first quarter of fiscal 2013 were used for the repayment of a portion of commercial paper borrowings and general corporate purposes. During the twenty-four weeks ended February 9, 2013, we repaid our $300 million Senior Note due in October 2012 using commercial paper borrowings. There were no repayments of debt in the comparable prior year period. For the twenty-four weeks ended February 9, 2013, net proceeds from commercial paper and short-term borrowings were $229.5 million, as compared to proceeds from net borrowings of $113.7 million in the comparable prior year period. Stock repurchases were $502.3 million in the current twenty-four week period as compared with $482.3 million in the comparable prior year period. For the twenty-four weeks ended February 9, 2013, proceeds from the sale of common stock and exercises of stock options provided $87.1 million, including $33.7 million in related tax benefits. In the comparable prior year period, proceeds from the sale of common stock and exercises of stock options provided $54.8 million, including $21.8 million in related tax benefits.

During fiscal 2013, we expect to invest in our business at an increased rate as compared to fiscal 2012. Our investment is expected to be directed primarily to our new-store development program, enhancements to existing stores and infrastructure, and our acquisition of AutoAnything. 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, Puerto Rico, Mexico, or Brazil, or located in urban or rural areas. During fiscal 2012 and fiscal 2011, our capital expenditures increased by approximately 18% and 2%, respectively, as compared to the prior year, and we expect our capital expenditures for fiscal 2013 to increase by 10% to 15% as compared to fiscal 2012. 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 31, 2013.

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, was 110.0% compared to 109.6% last year. 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 February 9, 2013, our after-tax return on invested capital ("ROIC") was 32.4% as compared to 32.2% 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 revolving credit facility, increasing the capacity under the revolving credit facility 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 $215.5 million in available capacity under our $1.0 billion credit facility at February 9, 2013. As of February 9, 2013, we have $3.7 million in letters of credit outstanding under the revolving credit facility.

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 February 9, 2013, we have $99.8 million in letters of credit outstanding under the letter of credit facility, which expires in June 2013.

In addition to the outstanding letters of credit issued under the committed facilities discussed above, we had $41.7 million in letters of credit outstanding as of February 9, 2013. These letters of credit have various maturity dates and were issued on an uncommitted basis.

On November 13, 2012, we issued $300 million in 2.875% Senior Notes due January 2023 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 November 13, 2012, were used to repay a portion of the outstanding commercial paper borrowings, which were used to repay the $300 million in 5.875% Senior Notes due in October 2012, 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 2.875% Senior Notes issued in November 2012, 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 February 9, 2013, 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 2.6:1 as of February 9, 2013, and was 2.4:1 as of February 11, 2012. 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 February 9, 2013, we have repurchased a total of 132.5 million shares at an aggregate cost of $12.0 billion, including 1,367,832 shares of our common stock at an aggregate cost of $502.3 million during the twenty-four week period ended February 9, 2013. On September 28, 2012, the Board voted to increase the authorization by $750 million to raise the cumulative share repurchase authorization from $11.90 billion to $12.65 billion. Considering cumulative repurchases as of February 9, 2013, we have $603.4 million remaining under the Board's authorization to repurchase our common stock. We did not repurchase shares of our common stock subsequent to February 9, 2013.

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 February 9, 2013, was $145.5 million compared with $102.3 million at August 25, 2012, and our total surety bonds commitment at February 9, 2013, was $32.6 million compared with $33.1 million at August 25, 2012.

Financial Commitments

As of February 9, 2013, there were no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the year ended August 25, 2012.

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 uses select measurements to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables.

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 February 9, 2013 and February 11, 2012.

                                                      A                   B                  A-B=C                  D                    C+D
                                                                                                                                    Trailing Four
                                                 Fiscal Year         Twenty-Four          Twenty-Eight         Twenty-Four            Quarters
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