View:
123
South
Front Street, Memphis, TN 38103 Phone (901) 495-6500
February
17, 2006
United
States Securities and Exchange Commission
Attn:
George F. Ohsiek, Jr.
100
F
Street, NE
Washington,
DC 20549
| RE: |
Form
10-K for fiscal year ended August 27, 2005
Form
10-Q for the quarter ended November 19, 2005
File
No. 001-10714
|
Dear
Mr.
Ohsiek,Jr.,
Below
are
our responses to your questions in your letter dated February 9, 2006. We have
repeated your questions and replied in bold
immediately under the question.
Form
10-K for Fiscal Year Ended August 27, 2005
Exhibit
13.1, Fiscal 2005 Annual Report
Selected
Financial Data, page 2
| 1. |
Reference
is made to your presentation of “Inventory turnover” and “Net inventory
turnover.” Because the numerator in each of the ratios includes cost of
sales related to pay-on-scan arrangements, but the denominator excludes
the inventory associated with pay-on-scan arrangements, we are concerned
that the ratios are not reflective of your true inventory turnover.
Please
tell us why you believe that these measures, as currently presented,
provide valid and useful information to investors, or otherwise tell
us
how you would propose to revise your disclosures in future filings.
Also
revise your disclosure to highlight the lack of comparability between
periods as a result of the pay-on-scan arrangements not having begun
until
fiscal 2004.
|
AutoZone
Response:
Beginning
with our Form 10-K for the fiscal year ending August 26, 2006, we will revise
the footnotes to the “Inventory turnover” and “Net inventory turnover” ratios to
state the cost of sales relating to pay-on-scan transactions and the merchandise
held under pay-on-scan arrangements for each year impacted by pay-on-scan.
We
believe that such increased disclosure provides the reader the necessary
information to calculate comparable inventory turns instead of adjusting the
ratio calculations such that they become non-GAAP financial measurements as
each
are currently computed using GAAP-based inputs.
Item
9A. Controls and Procedures, page 16
| 2. |
In
future filings, please revise your disclosure regarding changes to
internal controls over financial reporting to identify “any changes,” not
just “significant changes,” that occurred in the most recent quarter
“which have materially affected or are reasonably likely to materially
affect, your internal controls over financial reporting.” See Item 308(c)
of Regulation S-K. Also confirm to us that there were no changes
in your
internal controls over financial reporting during the fourth quarter
that
materially affected, or are reasonably likely to materially affect,
your
internal controls over financial
reporting.
|
AutoZone
Response:
Beginning
with our Form 10-Q for the fiscal quarter ended February 11, 2006, we will
revise our disclosures regarding internal controls over financial reporting
to
identify any changes that occurred in the most recent quarter which have
materially affected or are reasonably likely to materially affect, internal
controls over financial reporting.
During
or subsequent to the fiscal quarter ended August 27, 2005, there were no changes
in our internal controls which have materially affected or are reasonably likely
to materially affect, internal controls over financial
reporting.
Consolidated
Financial Statements, page 18
Notes
to Consolidated Financial Statements, page 22
Note
A. Significant Accounting Policies, page 22
| 3. |
In
future filings, please disclose your policy for classifying cash
flows
associated with derivative instruments designated as qualifying hedges,
as
there are two alternative classifications permitted under GAAP. Refer
to
paragraph 14 and footnote 4 to SFAS 95. Please show us how the disclosure
will read.
|
AutoZone
Response:
Beginning
with our Form 10-K for the fiscal year ending August 26, 2006, we will revise
our disclosures in Note A to state that cash flows associated with derivative
instruments designated as qualifying hedges of financing transactions are
reflected as a component of financing cash flows. The revised disclosure in
Note
A will read as follows:
Derivative
Instruments and Hedging Activities: AutoZone is exposed to market risk from,
among other things, changes in interest rates, foreign exchange rates and fuel
prices. From time to time, the Company uses various financial instruments to
reduce such risks. To date, based upon the Company’s current level of foreign
operations, hedging costs and past changes in the associated foreign exchange
rates, no instruments have been utilized to reduce this market risk. All of
the
Company’s hedging activities are governed by guidelines that are authorized by
AutoZone’s Board of Directors. Further, the Company does not buy or sell
financial instruments for trading purposes.
AutoZone’s
financial market risk results primarily from changes in interest rates. At
times, AutoZone reduces its exposure to changes in interest rates by entering
into various interest rate hedge instruments such as interest rate swap
contracts, treasury lock agreements and forward-starting interest rate swaps.
The Company complies with Statement of Financial Accounting Standards Nos.
133,
137, 138 and 149 (collectively “SFAS 133”) pertaining to the accounting for
these derivatives and hedging activities which require all such interest rate
hedge instruments to be recognized on the balance sheet at fair value. All
of
the Company’s interest rate hedge instruments are designated as cash flow
hedges. Refer to “Note B - Derivative Instruments and Hedging Activities” for
additional disclosures regarding the Company’s derivatives instruments and
hedging activities. Cash flows related to these instruments designated as
qualifying hedges are reflected in the accompanying consolidated statements
of
cash flows in the same categories as the cash flows from the items being hedged.
Accordingly, cash flows relating to the settlement of interest rate derivatives
hedging the forecasted issuance of debt have been reflected as a component
of
financing cash flows, while cash flows relating to the periodic settlement
of
interest rate derivatives hedging outstanding variable rate debt are recorded
as
an adjustment to interest expense and are therefore reflected as a component
of
operating cash flows.
Note
C. Accrued Expenses, page 27
| 4. |
Reference
is made to your disclosure of the changes in your accrued sales and
warranty returns for the last three years. In future filings, please
revise to show separately the activity in accrued sales returns and
accrued warranty reserves. Refer to Rules 5-04 and 12-09 of Regulation
S-X.
|
AutoZone
Response:
We
have recently concluded that warranty reserves are no longer a critical
accounting policy as the balance has significantly declined since the end of
fiscal 2003. Beginning with our Form 10-Q for the fiscal quarter ended February
11, 2006, we will no longer disclose the quarterly changes in our accrued
warranty reserves and sales returns due to the immateriality of the balances.
We
will continue to disclose any material adjustments (i.e. gains on transferring
liabilities to vendors, excess vendor allowances reclassified to inventory
and
charges to increase the reserve) related to the warranty reserve that occur
in a
quarter. As the balances were material at the beginning of fiscal 2004, we
will
disclose separately the warranty reserve activity from the accrued sales returns
in either a note to the financial statements or in Schedule II in accordance
with Rules 5-04 and 12-09 of Regulation S-X.
Form
8-K filed December 6, 2005
| 5. |
In
future filings please, revise to clearly and prominently identify
each
non-GAAP measure as a non-GAAP measure. For example, you should identify
“adjusted operating expenses,” “adjusted operating profit,” “adjusted
diluted earnings per share,” “adjusted debt/EITDAR,” “cash flows before
share repurchases and changes in debt,” “[adjusted] return on equity
(ROE),” and “[adjusted] return on invested capital (ROIC)” as non-GAAP
measures. We also believe you should revise the titles of the ROE
and ROIC
measures to call them “Adjusted” ROE and “Adjusted” ROIC. Additionally,
please revise to disclose for each non-GAAP measure presented the
substantive reasons why management believes that presentation of
the
non-GAAP financial measure provides useful information to investors
regarding your financial condition and results of operations. Refer
to the
Instructions to Item 2.02 of Form 8-K and Item 10(e)(1)(i) of Regulation
S-K. Finally, please ensure each non-GAAP measure presented is reconciled
to the most comparable GAAP measure. In this regard, we note that
you
currently have not provided a reconciliation of ROE or ROIC, as adjusted,
to ROE or ROIC, as computed using GAAP measures.
|
AutoZone
Response:
Beginning
with our Form 8-K for the fiscal quarter ended February 11, 2006, we will revise
our disclosures to clearly and prominently identify each non-GAAP measure as
a
non-GAAP measure. When applicable, we will revise the titles of the ROE and
ROIC
measures to call them “Adjusted” ROE and “Adjusted” ROIC and will provide a
reconciliation of ROE or ROIC, as adjusted, to ROE or ROIC, as computed using
GAAP measures. We will also revise our disclosure to discuss the substantive
reasons why we believe that the presentation of each non-GAAP financial measure
provides useful information to investors regarding our financial condition
and
results of operations.
Please
let us know if you have any further questions or if we can clarify any other
issues that you may have.
Yours
truly,
AUTOZONE,
INC.
| By: |
/s/
Charlie Pleas, III
Vice
President and Controller
(Principal
Accounting Officer)
|