SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 1-10714

AUTOZONE, INC.

123 South Front Street, Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)

(901) 495-6500
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x[X] No o[   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K § 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x[X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [   ]

The aggregate market value of the 71,488,267 shares of voting stock of the registrantand 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 registrant (excluding, for this purpose, shares held by officers, directors, or 10% stockholders) was $5,969,270,295 based on the last sales pricebusiness day of the Common Stock on October 15, 2002, as reported on the New York Stock Exchange. registrant’s most recently completed second fiscal quarter was $4,277,626,348.

The number of shares of Common Stock outstanding as of October 15, 2002,14, 2003, was 98,549,013.88,760,885.

Documents Incorporated By Reference

Portions of the definitive Proxy Statement to be filed within 120 days of August 31, 2002,30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 for the Annual Meeting of Stockholders to be held December 12, 2002,11, 2003, are incorporated by reference into Part III.

2

TABLE OF CONTENTS

3

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” and similar expressions. These are based on our assumptions and assessments made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors our management believesthat we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation, competition,competition; product demand,demand; the economy,economy; the ability to hire and retain qualified employees,employees; consumer debt levels, inflation,levels; inflation; gasoline prices,prices; war and the prospect of war, including terrorist activity, andactivity; availability of commercial transportation.transportation; and outcome of pending litigation. Forward-looking statements are not guarantees of future performance and actual results,results; developments and business decisions may differ from those contemplated by such forward-looking statements, and such events could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results. Please refer to the Risk Factors section contained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for more details.

4

PART I

Item 1. Business

Introduction

     We are the nation’s leading specialty retailer of automotive parts and accessories, with most of our sales to do-it-yourself (DIY) customers. We began operations in 1979 and at August 31, 2002,30, 2003, operated 3,0683,219 auto parts stores in the United States and 3949 in Mexico. We also sell parts and accessories online atautozone.com.autozone.com. Each auto parts storeof 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 and accessories. We also have a commercial sales program in the United States (AZ Commercial) that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers and service stations. We do not derive revenue from automotive repair or installation.

     In addition, we sell the ALLDATA automotive diagnostic and repair software which is also available through ALLDATA alldatapro.comand throughalldatadiy.com.

     At August 31, 2002,30, 2003, our stores were in the following locations:

5

Marketing and Merchandising Strategy

          We are dedicated to providing customers with superior service, value and quality automotive parts and products at conveniently located, well-designed stores. Key elements of this strategy are:

5

     Customer Service

          We believe that our customers value customer service; therefore, customer service is the most important element in our marketing and merchandising strategy. We emphasize that our AutoZoners (employees) should always put customers first by providing prompt, courteous service and trustworthy advice. Our electronic parts catalogs assistcatalog assists in the selection of parts and we offer lifetime warranties are offered on many of the parts we sell. Our satellite system in our domestic auto parts stores helps us to speed upexpedite credit or debit card and check approval processes and locate parts at neighboring AutoZone stores.

          Our stores generally open at 8 a.m. and close between 8 and 10 p.m. (with some open 24 hours) Monday through Saturday and typically open at 9 a.m. and close between 6 and 8 p.m. on Sunday. Some stores are open 24 hours, and some have extended hours of 7 a.m. until midnight seven days a week.

          AutoZoneWe also providesprovide specialty tools inthrough our Loan-A-Tool program. Customers can borrow a specialty tool, such as a steering wheel puller, thatfor which a DIY customer or a small repair shop would have little or no use for other than for a single job. AutoZoners also provide other free services, including check engine light readings; battery charging and installation;installation assistance; oil recycling; and testing of starters, alternators, batteries, sensors and actuators.

6

Merchandising

          ThisThe following table shows some of the types of products that we sell in our stores:sell:

6

          We believe that the satisfaction of DIY customers and professional technician customerstechnicians often is impacted by our ability to provide specific automotive products as requested. Our stores generally offer between 20,00021,000 and 22,00023,000 stock keeping units (“SKUs”), covering a broad range of vehicle types. Each store carries the same basic product line, but we tailor our parts inventory to the makes and models of the automobiles in each store’s trade area. Our hub stores carry a larger assortment of products that can be delivered to AZ Commercial customers or local satellite stores. Slower-selling products are alsogenerally available through our vendor direct program (VDP) which offers overnight delivery.

          We are constantly updating the products that we offer to assure that our inventory matches to the products that our customers want, when they want them.

Pricing

          We want to be perceived by our customers as the value leader in our industry by consistently providing quality merchandise at a good price, withbacked by a good warranty and backed by outstanding customer service. On many of our products we will offer multiple value choices in a good/better/best assortment, with value pricing offered and appropriate price and quality increases from the “good” products to the “better” and “best” products. We believe that our overall prices overall compare favorably to those of our competitors.

7

Marketing

          We believe that targeted advertising and marketing play important roles in succeeding in today’s environment. We are constantly working to understand our customers’ changing wants and needs so that we can build long lasting,long-lasting, loyal relationships. We utilize marketing and advertising primarily to educate customers about the overall importance of vehicle maintenance. We also seek to convey the message that AutoZone is THE brand that can provide “the most exciting Zone for vehicle solutions!” Broadcast and print media are designed primarily to increase store traffic. In-store signage and creative product placement help to educate customers about products they need as a means to increase average sales dollars per transaction.

Store Design and Visual Merchandising

          We design and build stores for a high visual impact. The typical AutoZone store has an industrial “high tech” appearance by utilizing colorful exterior and interior signage, exposed beams and ductwork and brightly lighted interiors. Maintenance products, accessories and miscellaneous items are attractively displayed for easy browsing by customers. In-store signage and special displays promote products in floor displays, endcaps and on the shelf. Store managers are able to customize areas of the store to prominently display products that are in demand in the local community.

AZ Commercial

          We believe we are the third largest aftermarket seller of automotive parts and products to repair shops in the United States. AZ Commercial is the brand of our program that sells parts and other products and services to local, regional and national repair garages, dealers and service stations. As a part of the program we offer credit and delivery to some of our commercial customers. The program operated out of 2,0091,941 stores as of August 31, 2002. We have opened30, 2003. Through our hub stores, thatwe offer a greater range of parts and products desired by commercial customersprofessional technicians and that can also be used as additiveadditional available inventory for local stores. In addition, some of our commercial customers receive shipments directly from our distribution centers. AZ Commercial has a national sales team focused on national and regional commercial accounts, as well as an outside sales force for customers located immediately around our commercial stores.

78

Store Operations

Store Formats

          As of August 31, 2002,30, 2003, we had domestic auto parts stores in the following square footage ranges:

          Substantially all AutoZone stores are based on standard store formats resulting in generally consistent appearance, merchandising and product mix. Approximately 85% to 90% of each store’s square footage is selling space, of which approximately 40% to 45% is dedicated to hard parts inventory. The hard parts inventory area is generally fronted by a counter or pods that runsrun the depth or length of the store, dividing the hard parts area from the remainder of the store. The remaining selling space contains displays of accessories and maintenance items.

          We have knowledgeable AutoZoners available to assist customers with their parts needs utilizing our proprietary electronic parts catalog with a videodisplay screen that is visible to both the AutoZoner and the customer. In addition to helping ensure fast, accurate parts lookup, the parts catalog will suggest additional items that a customer should purchase in order to properly install the merchandise being purchased.

          We believe that our stores are “destination stores,” generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity.adjacent stores. Therefore, we situate most stores on major thoroughfares with easy access and good parking. Approximately 2,4002,600 of our auto parts stores are freestanding, with the balance principally located within strip shopping centers. Freestanding large format stores typically have parking for approximately 40 to 45 cars on a lot of approximately 3/4 to one acre. Our smaller auto parts stores typically have parking for approximately 20 to 30 cars and are usually located on a lot of approximately 1/2 to 3/4 acre.

8

Store Personnel and Training

          Each auto parts store typically employs from ten10 to 16 AutoZoners, including a manager and, in some cases, an assistant manager. AutoZoners typically have prior automotive experience. All AutoZoners are encouraged to complete courses resulting in certification by the National Institute for Automotive Service Excellence (ASE), which is broadly recognized for training certification in the automotive industry. Although we do on-the-job training, we also provide formal training programs, including regular store meetings on specific sales and product issues, standardized training manuals and a specialist program that trains AutoZoners in several areas of technical expertise from both the companyCompany and from independent certification agencies. Training is supplemented with frequent store visits by management.

9

          Store managers getreceive financial incentives through performance-based bonuses. In addition, our growth has provided opportunities for the promotion of qualified AutoZoners. We believe these opportunities are important to attract, motivate and retain quality AutoZoners.

          Our domestic auto parts stores are primarily supervised through district managers who oversee approximately ten10 to 12 stores each and who report to regional managers. Regional managers with approximately 80 to 90 stores each, in turn, report to five Vice Presidents of Operations.

          All store support functions are centralized in our store support center in Memphis, Tennessee. We believe that this centralization enhances consistent execution of our merchandising and marketing strategystrategies at the store level, and reduceswhile reducing expenses and cost of sales.

Store Automation

          All of our stores have a proprietary electronic parts catalogscatalog that provideprovides parts information based on the make, model and year of an automobile. The catalog display screens are placed on the hard parts counter or pods where both AutoZoners and customers can view the screen. In addition, our satellite system enables the stores to speed upexpedite credit or debit card and check approval processes, immediately access national warranty data, implement real-time inventory controlcontrols and locate and hold parts at neighboring AutoZone stores.

          Our domestic auto parts stores utilize our computerized Store Management System, which includes bar code scanning and point-of-sale data collection terminals. The Store Management System provides administrative assistance and improved personnel scheduling at the store level, as well as enhanced merchandising information and improved inventory control. We believe the Store Management System also enhances customer service through faster processing of transactions and simplified warranty and product return procedures.

9

Store Development

          ThisThe following table showsreflects domestic auto parts store development during the past five fiscal years:

          We believe that expansion opportunities exist both in markets that we do not currently serve, and in markets where we can achieve a larger presence. We attempt to obtain high visibility sites in high traffic locations and undertake substantial research prior to entering new markets. The most important criteria for opening a new store are its projected future profitability and its ability to achieve our required investment hurdle rate. Key factors in selecting new site and market locations include population, demographics, vehicle profile, number and strength of competitors’ stores and the cost of real estate. WeIn reviewing the vehicle profile, we also consider the number of vehicles that are seven years old and older, “our kind of vehicles” (OKVs), as these vehicles are no longer under the original manufacturers’ warranty and will require more maintenance and repair than younger vehicles. We generally seek to open new stores within or contiguous to existing market areas and attempt to cluster development in new urban markets in a relatively short period of time in order to achieve economies of scale in distribution and marketing costs. In addition to continuing to lease or develop our own stores, we may occasionally evaluate potential acquisition candidates in new as well as in existing markets.candidates.

Purchasing and Supply Chain

          Merchandise is selected and purchased for all stores atthrough our store support center in Memphis.Memphis, Tennessee. No one class of product accounts for as much as ten10 percent of our total sales. In fiscal 2002,2003, no single supplier accounted for more than ten10 percent of our total purchases. We generally have few long-term contracts for the purchase of merchandise. We believe that we have excellent relationships with suppliers. We also believe that alternative sources of supply exist, at similar cost, for substantially all types of product sold.

          Our vendors ship substantially all of our merchandise to our distribution centers. Stores typically place orders on a weekly basis with merchandise shipped from the warehouse generally within 24 hours of receipt of the order.

10

          Our hub stores have increased our ability to distribute products on a timely basis to each store. A hub store is able to provide replenishment of sold products and deliver special order products to a store in its coverage area generally within 24 hours. Hub stores are replenished from distribution centers multiple times per week.

Competition

          The sale of automotive parts, accessories and maintenance items is highly competitive in many areas, including name recognition, product availability, customer service, store location and price, with many competitors.price. AutoZone competes in both the DIYretail (DIY) and commercial (do it for me, “DIFM”) auto parts and accessories markets.

          Competitors include national and regional auto parts chains, independently owned parts stores, wholesalers and jobbers, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores, supermarkets, drugstores and home

11

stores that sell aftermarket vehicle parts and supplies, chemicals, accessories, tools and maintenance parts. AutoZone competes on the basis of customer service, including the knowledge and expertisetrustworthy advice of our AutoZoners, merchandise selection and availability, price, product warranty, store layouts and location.

Trademarks and Patents

          We have registered several service marks and trademarks in the United States Patent and Trademark office as well as in other countries, including our service markmarks, “AutoZone” and “Get in the Zone,” and trademarks, “AutoZone,” “Duralast”“Duralast,” “Duralast Gold,” “Valucraft,” and “ALLDATA.” We believe that the “AutoZone” service markmarks and trademarks are important components inof our merchandising and marketing strategy.

Employees

          As of August 31, 2002,30, 2003, we employed 44,179approximately 48,000 persons in the U.S., approximately 27,00060 percent of whom were employed full-time. Approximately 91About 90 percent of our AutoZoners were employed in stores or in direct field supervision, approximately six7 percent in distribution centers and approximately three3 percent in store support functions. We employed approximately 700 persons in our Mexico operations.

          We have never experienced any material labor disruption and believe that relations with our labor relationsAutoZoners are generally good.

AutoZone Website

          AutoZone’s primary website is at http://www.autozone.com. We make available, free of charge, at our corporate website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

12

Executive Officers of the Registrant

          The following table lists our executive officers. The title of each executive officer includes the words “Customer Satisfaction” which reflects our commitment to customer service as part of our marketing and merchandising strategy.service. Officers are elected by and serve at the discretion of the Board of Directors.

11

Steve Odland, 44—45—Chairman, President, Chief Executive Officer and Director

Michael Archbold, 42—43—Senior Vice President and Chief Financial Officer

Bruce G. Clark, 57—58—Senior Vice President and Chief Information Officer

Brett D. Easley, 44—45—Senior Vice President–Merchandising

Harry L. Goldsmith, 51—52—Senior Vice President, Secretary and General Counsel

Lisa R. Kranc, 49—50—Senior Vice President–Marketing

Michael E. Longo, 41—42—Senior Vice President–Operations, AZ Commercial and ALLDATA

13

2001, Senior Vice President–Supply Chain since 1998 and Vice President–Distribution since 1996. Mr. Longo has been employed by AutoZone since 1992.

12

Robert D. Olsen, 49—50—Senior Vice President–Mexico and Store Development

William C. Rhodes, III, 3738—Senior Vice President–Supply Chain and Information Technology

Daisy L. Vanderlinde, 5152—Senior Vice President–Human Resources and Loss Prevention

Tricia K. Greenberger, 33—ViceCharlie Pleas, III, 38 —Vice President and Controller

     Tricia K. Greenberger

Item 2. Properties

          ThisThe following table showsreflects the square footage and number of leased and owned properties for our domestic stores as of August 31, 2002:30, 2003:

          We have 2,998,834 square feet in our distribution centers servicing our auto partsdomestic stores, allmost of which is owned, except for 998,237 square feet that is leased. The domestic distribution centers are located in Arizona, California, Georgia, Illinois, Louisiana, Ohio, Tennessee and Texas.

14

          Our store support center, which we own, is located in Memphis, Tennessee, and consists of 260,000 square feet. We also own and lease other properties that are not material in the aggregate.

13

Item 3. Legal Proceedings

               We are a defendantAutoZone, Inc., was one of multiple defendants in a lawsuit entitled “Coalition for a Level Playing Field, L.L.C.,et al.,v. AutoZone, Inc., Wal-mart Stores, Inc., Advance Auto Parts, Inc., O’Reilly Automotive, Inc., and Keystone Automotive Operations, Inc.,et al.” filed in the U.S. District Court for the Eastern District of New York in February 2000. The case was filedbrought by over 100approximately 225 plaintiffs, which are principally automotive aftermarket warehouse distributors and jobbers. The plaintiffs claimclaimed that the defendants have knowingly received volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers’ profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. Plaintiffs’ third amended and corrected complaint seeksPlaintiffs sought unspecified damages suffered by each plaintiff (prior to statutory trebling), ranging from several million dollars to $35 million for each plaintiff, and a permanent injunction prohibiting defendants from committing further violations of the Robinson-Patman Act and from opening any further stores to compete with plaintiffs as long as defendants continue to violate the Act. The litigation is currentlyclaims of 22 of the original plaintiffs were tried to a jury verdict in favor of AutoZone in January 2003. On February 26, 2003, the plaintiffs, involved in the early stagestrial, filed a notice to appeal. The U.S. Circuit Court of discovery. We do not know howAppeals for the Second Circuit will hear oral argument on the appeal on November 5, 2003. On July 22, 2003, approximately 200 plaintiffs have calculatedin the original lawsuit, whose cases had been dismissed without prejudice and with leave to reinstate their alleged damages. We intendclaims, filed a notice to be reactivated as parties in the lawsuit and for their claims against the defendants to be reinstated. While the outcome of this matter cannot be predicted, AutoZone intends to vigorously defend against this action and believe that we have substantive defensesit. On September 19, 2003, the previously dismissed plaintiffs filed a “Motion for a Preliminary Injunction (and Related Temporary Restraining Order) Against the AutoZone Defendants as to allPayment On Scan Transactions with the Auto Parts Manufacturers.” AutoZone is currently unable to determine the merits of the motion or the claims inof the complaint.plaintiffs. However, AutoZone intends to vigorously defend against the motion.

          We areAutoZone is also involved in various other legal proceedings incidental to the conduct of our business. Although the amount of liability that may result from these other proceedings cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our financial condition, or results of operations.operations, or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

          None.

1415

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

          AutoZone’s common stock is listed on the New York Stock Exchange under the symbol “AZO.” On October 15, 2002,14, 2003, there were 2,9563,212 stockholders of record, which does not include the number of beneficial owners whose shares were represented by security position listings.

          We currently do not pay a cash dividend on our common stock. Any payment of dividends in the future iswould be dependent upon our financial condition, capital requirements, earnings, cash flow and other factors.

          The following table sets forth the high and low sales prices per share of common stock, as reported by the New York Stock Exchange, for the periods indicated:

1516

Item 6. Selected Financial Data

1617

18

Quarterly Summary
(unaudited)

19

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

     For an understanding of the significant factors that influenced our performance during the past three fiscal years, this financial review should be read in conjunction with the Consolidated Financial Statements presented in this Form 10-K.

Disclosure and Internal ControlsFiscal 2003 Compared with Fiscal 2002

     AsFor the year ended August 30, 2003, AutoZone reported sales of $5.457 billion (52 weeks) compared with $5.326 billion (53 weeks) for the year ended August 31, 2002, an evaluation was performed under the supervisiona 2.5% increase from fiscal 2002. At August 30, 2003, we operated 3,219 domestic auto parts stores and 49 in Mexico, compared with the participation of AutoZone’s management, including the CEO3,068 domestic auto parts stores and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, AutoZone’s management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of39 in Mexico at August 31, 2002. No significant changesExcluding sales from the extra week included in AutoZone’s internal controlsthe prior year, sales were up 4.6% (see Reconciliation of Non-GAAP Financial Measures). Same store sales, or sales for domestic stores open at least one year, increased approximately 3% during the year, including flat retail same store sales and an increase for commercial sales in other factors have occurred that could significantly affect controls subsequentsame stores by approximately 27%. The improvement in same store sales was due more to August 31, 2002.

Critical Accounting Policies

Product Warranties

     We provide our customers limited warranties on certain products that range from 30 days to lifetime warranties. We provide a reserve for warranty obligations atan increase in average dollars spent per transaction over the time of sale based on each product’s historical return rate. Certain product vendors pay all or a portion of our warranty expense. However, at times,amounts in the vendors may not cover allsame period of the warranty expense. If we materially underestimate our warranty expense on products that are not fully warranted to us by our vendors, we may experience a material adverse impact on our reported financial position or results of operations. If we incorrectly estimate our warranty expense, we will recognize any adjustmentprior year than an increase in income at the time it is determined.

Litigation and Other Contingent Liabilities

     We have received claims related to and been notified that we are a defendant in a number of legal proceedings resulting from our business, such as employment matters, product liability, general liability related to our store premises and alleged violationcustomer count. The balance, of the Robinson-Patman Act (as specifically described in Note Mincrease of 4.6%, was due to new store sales for fiscal 2003 which contributed 1.9 percentage points of the Consolidated Financial Statements). We calculate contingent loss accruals using our best estimateincrease; ALLDATA and Mexico sales which contributed 0.5 percentage points of our probable and reasonably estimable contingent liabilities, such as lawsuits and our retained liability for insured claims. We do not believe that any of these contingent liabilities, individually orthe increase, while TruckPro sales in the aggregate, will have a material adverse effect upon our consolidated financial positionprior year of $47.6 million reduced the increase by 0.9 percentage points.

     Gross profit for fiscal 2003 was $2.515 billion, or results46.1% of operations. However, if our estimates related to these contingent liabilities are incorrect, the future resultsnet sales, compared with $2.375 billion, or 44.6% of operationsnet sales for any particular fiscal quarter or year could be materially adversely affected. Some of our litigation is being conducted before juries in states where past jury awards have been significant, and we are unable to predict the results of any jury verdict. If we incorrectly estimate our contingent liabilities, we will recognize any adjustment in income at the time it is determined.

17

Vendor Allowances

     We receive various payments and allowances from our vendors based on volume of purchases and in payment of services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and cooperative advertising funds. Typically these funds are determined periodically and are, at times, dependent on projected purchase volumes and advertising plans. Certain vendor allowances are used exclusively for promotions and other direct expenses and are recognized as a reduction to2002. Operating, selling, general and administrative expenses when earned. Rebates and other miscellaneous incentives are earned based on purchases and/for fiscal 2003 decreased to $1.597 billion, or product sales. These monies are treated29.3% of net sales, from $1.604 billion, or 30.1% of sales for fiscal 2002. For fiscal 2003, gross profit, as a reductionpercentage of inventories and are recognizedsales, improved by 1.5 percentage points, while operating expenses, as a reduction to costpercentage of sales, asdeclined by 0.8 percentage points. Operating profit for fiscal 2003 increased 19% over the inventories are sold. The amounts to be received are subject to changes in market conditions, vendor marketing strategiesprior year.

     Gross profit, operating expenses and changes inoperating profit for fiscal years 2003 and 2002 were impacted by the profitabilityfollowing non-recurring or sell-through of the related merchandise for AutoZone.infrequent items:

Restructuring and Impairment Charges

	•		For fiscal 2003, a $4.6 million pre-tax gain as a result of the disposition of properties associated with the fiscal 2001 restructuring and impairment charges
	•		For fiscal 2003, a $10.0 million pre-tax negative impact and the reclassification of certain vendor funding to increase operating expenses by $53 million and decrease cost of goods sold by $43 million, both as a result of the adoption of Emerging Issues Task Force Issue No. 02-16 regarding vendor funding
	•		For fiscal 2003, a $4.7 million pre-tax gain associated with the settlement of certain liabilities and the repayment of a note associated with the fiscal 2002 sale of the TruckPro business

     In fiscal 2001, AutoZone recorded restructuring and impairment charges of $156.8 million. The planned closure of 51 domestic auto parts stores and the disposal of real estate projects in process and excess properties accounted for the largest portion, or $56.1 million, of the charge. In fiscal 2002, these stores were closed, and sales of certain excess properties resulted in gains of approximately $2.6 million. Remaining excess properties are currently being marketed for sale. During the third quarter of fiscal 2002, all remaining excess properties were reevaluated. At that time, it was determined that several properties could be developed. This resulted in the reversal of accrued lease obligations totaling $6.4 million. It was also determined that additional writedowns were needed to state remaining excess properties at fair value. These writedowns totaled $9.0 million. Because fiscal 2002 adjustments offset, there was no impact on net income.

     Another portion of the charge, $32.0 million, related to other asset writedowns and the accrual of lease obligations associated with the closure of a supply depot and for the unoccupied ALLDATA office building. During the fourth quarter of fiscal 2002, the ALLDATA office building was sold to a third party. The reserve previously established was adequate to cover the loss incurred on the sale. We continue to pursue the sale, sublease or early termination of the leases associated with the remaining leased facilities.

1820

     We also reserved $30.1 million for inventory rationalization, including a provision for inventory losses in closed stores. All

     For fiscal 2003, excluding the above items, gross profit, as a percentage of sales, improved by 0.7 percentage points while operating expenses, as a percentage of sales, declined by 1.9 percentage points. Comparable operating profit for fiscal 2003 increased by 23.9%, as operating margin improved 2.6 percentage points to 16.8% from 14.2% last year (see Reconciliation of Non-GAAP Financial Measures). The improvements in gross profit and disposalsgross margin reflect the additive impact of inventory took placenew merchandise, a reduction in our product warranty expense, and the benefit of more strategic and disciplined pricing derived from our category management system. Improvements, in operating profit and operating margin, reflect our relentless expense discipline, in particular, the leveraging of salaries and information technology spending during fiscal 2003.

     Net interest expense for fiscal 2003 was $84.8 million compared with $79.9 million during fiscal 2002. The reserveincrease in interest expense for fiscal 2003 was adequateprimarily due to cover losses incurred.higher levels of debt compared with the 2002 fiscal year. Weighted-average borrowings for fiscal 2003 were $1.51 billion, compared with $1.33 billion for fiscal 2002; and, weighted-average borrowing rates, excluding the impact of debt amortization and facility fees, remained relatively flat at 4.4% for both fiscal years.

     AutoZone’s effective income tax rate declined slightly to 37.9% of pretax income for fiscal 2003 as compared to 38.1% for fiscal 2002.

          Asset writedowns and contractual obligations aggregating $29.9 million relatedNet income for fiscal 2003 increased by 20.9% to the planned sale of TruckPro, our heavy-duty truck parts subsidiary, were recorded. In December 2001, TruckPro was sold to a group of investors for cash proceeds of $25.7$517.6 million, and a promissory note. We have deferred a gain ondiluted earnings per share increased by 33.5% to $5.34 from $4.00 reported for the saleyear-ago period. Excluding the non-recurring, infrequent items listed above, comparable net income increased 26.4% and diluted earnings per share increased 39.4% (see Reconciliation of $3.6 million due to uncertainties associated with the realizationNon-GAAP Financial Measures). The impact of the gain. Refer to Note Kfiscal 2003 stock repurchases on diluted earnings per share in the Consolidated Financial Statements for further discussionfiscal 2003 was an increase of this transaction.

     The remainder of the restructuring and impairment charges, $8.7 million, related to contractual obligations, severance and other charges. We did not reverse any reserves into income.

     Total remaining accrued obligations for restructuring charges were $18.1 million at August 31, 2002. The following table presents a summary of the activity in accrued obligations for the restructuring charges:

Fiscal 2002 Compared with Fiscal 2001

     Net sales for fiscal 2002 increased by $507.3 million, or 10.5%, over net sales for fiscal 2001. Excluding TruckPro, which was sold during the year, net sales increased 13%. The sales increases were attributable to a 9% increase in comparable store sales, or sales for domestic auto parts stores opened at least one year. New store sales in fiscal year 2002 contributed two percentage points and net sales from the 53rd week contributed approximately two percentage points of the increase. Comparable store sales increased as a result of an increase in customer count and an increase in average dollars spent per transaction over the amounts in the prior year.

At August 31, 2002, we operated 3,068 domestic auto parts stores and 39 in Mexico, compared with 3,019 domestic auto parts stores, 21 in Mexico and 49 TruckPro stores at August 25, 2001. Excluding sales from the extra week in fiscal 2002, net sales increased 8.3% (see Reconciliation of Non-GAAP Financial Measures). Same store sales, or sales for domestic stores open at least one year, increased approximately 9% during fiscal 2002, including an increase in retail same store sales of approximately 8% and an increase for commercial sales in same stores by approximately 17%. Comparable store sales increased in fiscal 2002 as a result of an increase in customer count and an increase in average dollars spent per transaction over the amounts in the 2001 fiscal year. New stores contributed approximately 2 percentage points to the increase during fiscal 2002; whereas, the overall sales increase was somewhat offset by the decrease in sales associated with TruckPro, which was sold in December 2001, of $47.6 million

1921

in fiscal 2002 and $148.5 million in fiscal 2001. ALLDATA and Mexico sales composed the remainder of the increase in sales during fiscal 2002.

     Gross profit for fiscal 2002 was $2.4$2.375 billion, or 44.6 % of net sales, compared with $2.013 billion, or 41.8% of net sales for fiscal 2001. Excluding the impact of the extra week in fiscal 2002 and the nonrecurring charges in fiscal 2001, gross profit for fiscal 2002 was $2.325 billion, or 44.6% of net sales, compared with $2.0$2.043 billion, or 42.4% of net sales (excluding nonrecurring charges) for fiscal 2001.2001 (see Reconciliation of Non-GAAP Financial Measures). Gross margin improvement for fiscal 2002 reflected lower product costs, more efficient supply chain costs, reduced inventory shrinkage, the benefits of more strategic and disciplined pricing due to category management and the addition of more value-added, high-margin merchandise than in the prior2001 fiscal year.

     Operating, selling, general and administrative expenses for fiscal 2002 increased by $105.5 million over such expenses for fiscal 2001 but declined as a percentage of net sales from 31.1% to 30.1% (excluding nonrecurring charges in the prior year). The improved ratio reflectsreflected the fact that revenues rose more rapidly than the growth of store-level expenses (a 1.1 percentage point improvement), combined with operating savings resulting from the restructuring in fiscal year 2001 related to controlling staffing, base salaries and technology spending of 0.4 percentage points. Additionally, the prior2001 fiscal year included other expenses related to strategic initiatives not included in the restructuring and impairment charges of 0.3 percentage points. The adoption of new accounting rules for goodwill reduced operating expenses in fiscal 2002 by approximately $8.6 million, or 0.2 percentage points. These improvements in the expense ratio were partially offset by additional bonus, legal, pension and insurance expenses incurred in the current2002 fiscal year of 1.1 percentage points.

     Net interest expense for fiscal year 2002 was $79.9 million compared with $100.7 million during fiscal 2001. The decrease in interest expense for fiscal 2002 was primarily due to lower levels of debt compared with the prior2001 fiscal year and lower average interest rates on short term borrowings.borrowing rates. Weighted average borrowings for fiscal year 2002 were $1.33 billion, compared with $1.45 billion for fiscal 2001. Additionally, weighted average borrowing rates, excluding the impact of debt amortization and facility fees, were lower in the current2002 year compared with the prior2001 fiscal year at 4.41%4.4% compared with 6.24%6.2%.

     AutoZone’s effective income tax rate was 38.1% of pretax income for fiscal 2002 and 38.8% for fiscal 2001. The decrease in the tax rate is due primarily to the change in goodwill accounting.

Fiscal 2001 Compared with Fiscal 2000

     Net salesincome for fiscal 20012002 increased by $335.5to $428.1 million or 7.5% over net salesfrom $175.5 and diluted earnings per share increased to $4.00 from $1.54 reported for fiscal 2000. Same store sales, or sales for domestic auto parts stores opened at least one year, increased 4%. Additionally, new store sales2001. Excluding the positive impact of the extra week in fiscal 2001 contributed 3% of the sales increase. The remaining sales increase was due to increased sales in our Mexico stores, ALLDATA2002 and TruckPro. At August 25, 2001, we operated 3,019 domestic auto parts stores compared with 2,915 at August 26, 2000.

     Gross profit for fiscal 2001 (excluding nonrecurring charges) was $2.0 billion, or 42.4% of net sales, compared with $1.9 billion, or 41.9% of net sales, for fiscal 2000. The increase in the gross profit percentage was primarily due to a shift in sales mix to higher gross margin products in the current year and higher warranty expense in the prior year.

20

     Operating, selling, general and administrative expenses for fiscal 2001 increased by $130.6 million over such expenses for fiscal 2000 (excluding nonrecurring charges) and increased as a percentage of net sales from 30.5% to 31.1%. The increase in the expense ratio was primarily due to an increase in group insurance expenses of 0.1 percentage points, an increase in risk management insurance expenses of 0.1 percentage points, an increase in other expenses related to strategic initiatives not included in the restructuring and impairment charges of 0.3 percentage pointsfrom fiscal 2001, comparable net income for fiscal 2002 increased to $409.9 million from $271.3 million for fiscal 2001; and higher levels of payroll of 0.1 percentage points, primarily in the first half of the year.

     Net interest expensediluted earnings per share for fiscal 2002 increased to $3.83 from $2.38 for fiscal 2001 was $100.7 million compared with $76.8 million for fiscal 2000. The increase in interest expense is due to higher weighted average borrowings in fiscal 2001 compared with fiscal 2000. Weighted average borrowings were $1.45 billion in fiscal 2001 compared with $1.18 billion in fiscal 2000. Weighted average borrowing rates were slightly lower in fiscal 2001 compared with fiscal 2000 at 6.24% compared with 6.37%.

     AutoZone’s effective income tax rate was 38.8%(see Reconciliation of pretax income for fiscal 2001 and 38.5% for fiscal 2000.

Liquidity and Capital Resources

Capital Requirements

     AutoZone’s primary capital requirements have been the funding of its continued new-store development program, inventory requirements and stock repurchases. We opened or acquired 1,340 net new domestic auto parts stores from the beginning of fiscal 1998 to August 31, 2002. Cash flow generated from store operations provides us with a significant source of liquidity. Net cash provided by operating activities was $739.1 million in fiscal 2002, $458.9 million in fiscal 2001 and $513.0 million in fiscal 2000. The increase in cash flow from operations in the current year is due primarily to higher net income, a larger increase in accounts payable and accruals and higher employee stock option exercises.

     We invested $117.2 million in capital assets in fiscal 2002 compared with $169.3 million in fiscal year 2001 and $249.7 million in fiscal year 2000. In fiscal 2002, we opened 102 new auto parts stores in the U.S. and 18 in Mexico, replaced 15 U.S. stores and closed 53 U.S. stores. During the year we sold TruckPro, our heavy-duty truck parts subsidiary, which operated 49 stores, for cash proceeds of $25.7 million. Net cash flows used in investing activities were $64.5 million in fiscal 2002, compared with $122.1 million in fiscal 2001 and $242.3 million in fiscal 2000.

     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 by expansion. We believe that we will be able to continue financing much of our inventory growth through favorable payment terms from suppliers, but there can be no assurance that we will be successful in obtaining such terms.

21

     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 to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance will be funded through borrowings. We anticipate that we will be able to obtain such financing in view of our credit rating and favorable experiences in the debt market in the past.

Credit Ratings

     At August 31, 2002, AutoZone had a senior unsecured debt credit rating from Standard & Poor’s of BBB+ and a commercial paper rating of A-2. Moody’s Investors Service had assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. Both rating agencies had AutoZone listed as having a “negative outlook.” Subsequent to year end, Standard & Poor’s changed its outlook for AutoZone to “positive” and Moody’s changed its outlook to “stable.” If these credit ratings drop, AutoZone’s interest expense may increase; similarly, we anticipate that our interest expense may decrease if our investment ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited, and obligations under our equity forward agreements may be accelerated, requiring the agreements to be settled prior to their planned settlement date.

Debt Facilities

     We maintain $950 million of revolving credit facilities with a group of banks. Of the $950 million, $300 million expires in May 2003. The remaining $650 million expires in May 2005. The 364-day facility expiring in May 2003 includes a renewal feature as well as an option to extend the maturity date of the then-outstanding debt by one year. The credit facilities exist largely to support commercial paper borrowings and other short term unsecured bank loans. At August 31, 2002, outstanding commercial paper of $223.2 million is classified as long term as we have the ability and intention to refinance it on a long term basis. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the agreement) or a competitive bid rate at our option. We have agreed to observe certain covenants under the terms of our credit agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage.

     During fiscal year 2001, we entered into $200 million and $115 million unsecured bank term loans with a group of banks. During fiscal 2002, the $200 million two-year unsecured term loan was increased to $350 million and the maturity was extended to November 2004. The rate of interest payable is a function of LIBOR or the bank’s base rate (as defined in the agreement) at our option.

     After the fiscal year end, on October 1, 2002, we filed a shelf registration with the Securities and Exchange Commission. This filing will allow us to sell as much as $500 million in debt securities for general corporate purposes, including repaying, redeeming or repurchasing existing debt, and/or to fund working capital, capital expenditures, new store openings, stock repurchases and acquisitions. On October 16, 2002, we issued $300 million of 5.875% Senior Notes under the registration statement. The Notes mature in October 2012 and interest is payable semi-annually on April 15 and October 15.

22

     All of the repayment obligations under our bank lines of credit may be accelerated and come due prior to the scheduled payment date if AutoZone experiences a change in control (as defined in the agreements) of AutoZone or its Board of Directors or if covenants are breached related to total indebtedness and minimum fixed charge coverage. We expect to remain in compliance with these covenants.

Stock Repurchases

     As of August 31, 2002, our Board of Directors had authorized the repurchase of up to $2.3 billion of common stock in the open market. From January 1998 to August 31, 2002, approximately $2.1 billion of common stock had been repurchased, including shares committed under outstanding forward purchase contracts. During fiscal 2002, we repurchased $699.0 million of common stock.Non-GAAP Financial Measures). The impact of the fiscal 2002 stock repurchases on diluted earnings per share in fiscal 2002 was an increase of $0.16. Subsequent to year end, we repurchased 1.1 million shares in partial settlement of the forward purchase contract outstanding at August 31, 2002, at an average cost of $69.91 per share.

     At times, we utilize equity forward agreements to facilitate our repurchase of common stock and to lock in current market prices for later purchase. Our obligations under the equity forward agreements are not reflected on our balance sheet. AutoZone, at its option, may settle the forward purchase agreements in cash or in common stock.

Financial Commitments

     The following table shows AutoZone’s obligations and commitments to make future payments under contractual obligations:

2322

     The following table shows AutoZone’s other commitments:

     A substantial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to cover premium and deductible payments to our workers’ compensation carrier.

     In conjunction with our commercial sales program, we offer credit to some of our commercial customers. The receivables related to the credit program are sold to a third party at a discount for cash with limited recourse. AutoZone has established a reserve for this recourse. At August 31, 2002, the receivables facility had an outstanding balance of $23.5 million and the balance of the recourse reserve was $1.9 million.

     AutoZone has a synthetic lease facility of $30 million in total. The facility expires in fiscal 2006. At August 31, 2002, $28.2 million in synthetic lease obligations were outstanding, relating to a small number of our domestic auto parts stores. The synthetic leases qualify as operating leases for accounting purposes and are not reflected as an asset or a liability on our balance sheet. The lease payments on the stores are reflected in the income statement in operating expenses and we depreciate the underlying assets for tax purposes.

     We have subleased some of our leased real property to other entities, including the purchaser of our former TruckPro business. If the purchaser of the TruckPro business becomes unable to meet its obligations under the subleases, we might incur liabilities in connection with the recovery and subsequent sublease or lease termination of the properties.

Inflation

     AutoZone does not believe its operations have been materially affected by inflation. We have been successful, in many cases, in mitigating the effects of merchandise cost increases principally through efficiencies gained through economies of scale, selective forward buying and the use of alternative suppliers.

Seasonality and Quarterly Periods

     AutoZone’s business is somewhat seasonal in nature, with the highest sales occurring in the summer months of June through August, in which average weekly per storeper-store sales historically have been about 15% to 25% higher than in the slower months of December through February. During short periods of time, AutoZone’s business is alsoa store’s sales can be affected by weather conditions.

24

Extremely hot or extremely cold weather tends tomay enhance sales by causing parts to fail and spurring sales of seasonal products. Mild or rainy weather tends to soften sales as parts failure rates are lower in mild weather and elective maintenance is deferred during periods of rainy weather. Over the long run,longer term, the effects of weather balance out, as we have stores throughout the United States.

     Each of the first three quarters of AutoZone’s fiscal year consists of 12 weeks, and the fourth quarter consists of 16 weeks (17 weeks in fiscal 2002). Because the fourth quarter contains the seasonally high sales volume and consists of 16 weeks (17 weeks in fiscal 2002), compared towith 12 weeks for each of the first three quarters, our fourth quarter represents a disproportionate share of the annual net sales and net income. The fourth quarter of fiscal 2003 represented 33.5% of annual net sales and 40.1% of net income; the fourth quarter of fiscal 2002, represented 34.6% of annual net sales and 41.6% of net income; the fourth quarter of fiscal 2001, excluding nonrecurring charges, represented 34.1% of annual net sales and 43.9% of net income. Fiscal year 2002 consisted of 53 weeks, with the fiscal fourth quarter including 17 weeks. Accordingly, the fourth quarter of fiscal 2002 included the benefit of an additional week of net sales of $109.1 million and net income of $18.3 million.

Recent Accounting PronouncementsLiquidity and Capital Resources

     Net cash provided by operating activities was $698.3 million in fiscal 2003, $739.1 million in fiscal 2002 and $458.9 million in fiscal 2001. Cash flow generated from store operations provides us with a significant source of liquidity. Our new-store development program requires working capital, predominantly for inventories. During the past three fiscal year periods, we have improved our accounts payable to inventory ratio to 87% at August 30, 2003, from 83% at August 31, 2002, and 76% at August 25, 2001. In each of the three year periods, the improvement in this ratio was a source of cash from operations, particularly in fiscal 2002 when the ratio increased 7 percentage points. The increase in merchandise inventories, required to support new-store development and sales growth, has largely been financed by our vendors, as evidenced by the higher accounts payable to inventory ratio.

23

     AutoZone’s primary capital requirement has been the funding of its continued new store development program. From the beginning of fiscal 1999 to August 30, 2003, we have opened 562 net new domestic auto parts stores. Net cash flows used in investing activities were $167.8 million in fiscal 2003, compared with $64.5 million in fiscal 2002 and $122.1 million in fiscal 2001. The increase in cash used in investing activities during fiscal 2003 as compared to fiscal 2002 is due primarily to increased store development activities in the current year and proceeds from the sale of the TruckPro business in the prior year. We invested $182.2 million in capital assets in fiscal 2003 compared with $117.2 million in fiscal 2002 and $169.3 million in fiscal 2001. New store openings in the U.S. were 160 for fiscal 2003, 102 for fiscal 2002 and 107 for fiscal 2001. During fiscal 2002, we sold TruckPro, our heavy-duty truck parts subsidiary, which operated 49 stores, for cash proceeds of $25.7 million. Proceeds from capital asset disposals totaled $14.4 million for fiscal 2003, $25.1 million for fiscal 2002 and $44.6 million for fiscal 2001.

     Net cash used in financing activities was $530.2 million in fiscal 2003, $675.4 million in fiscal 2002 and $336.5 million in fiscal 2001. The net cash used in financing activities is primarily attributable to purchases of treasury stock which totaled $891.1 million for fiscal 2003, $699.0 million for fiscal 2002 and $366.1 million for fiscal 2001. Fiscal 2003 net proceeds from the issuance of debt securities, including repayments on other debt and the net change in commercial paper borrowings, offset the increased level of treasury stock purchases by approximately $322 million.

     We expect to open approximately 195 new stores during fiscal 2004. 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 by expansion. We believe that we will be able to continue to finance much of our inventory requirements through favorable payment terms from suppliers.

     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 to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance will be funded through borrowings. We anticipate that we will be able to obtain such financing in view of our credit rating and favorable experiences in the debt markets in the past.

Credit Ratings

     At August 30, 2003, AutoZone had a senior unsecured debt credit rating from Standard & Poor’s of BBB+ and a commercial paper rating of A-2. Moody’s Investors Service had assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. As of August 30, 2003, both Moody’s and Standard & Poor’s had AutoZone listed as having a “stable” outlook. Subsequent to the 2003 fiscal year end, Moody’s changed our outlook to “negative,” while confirming AutoZone’s existing credit ratings. If our credit ratings drop, our interest expense may increase; similarly, we anticipate that our interest expense may decrease if our investment ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will

24

increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited.

Debt Facilities

     We maintain $950 million of revolving credit facilities with a group of banks. Of the $950 million, $300 million expires in May 2004. The remaining $650 million expires in May 2005. The portion expiring in May 2004 includes a renewal feature as well as an option to extend the maturity date of the then-outstanding debt by one year. The credit facilities exist largely to support commercial paper borrowings and other short term unsecured bank loans. At August 30, 2003, outstanding commercial paper of $268 million, the 6% Notes due November 2003 of $150 million and other debt of $2.7 million are classified as long term, as we have the ability and intention to refinance them on a long term basis. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the agreement) or a competitive bid rate at our option. We have agreed to observe certain covenants under the terms of our credit agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage. As of August 30, 2003, we are in compliance with all covenants.

     On October 16, 2002, we issued $300 million of 5.875% Senior Notes. The notes mature in October 2012, and interest is payable semi-annually on April 15 and October 15. A portion of the proceeds from these senior notes was used to prepay a $115 million unsecured bank term loan due December 2003, to repay a portion of our outstanding commercial paper borrowings, and to settle interest rate hedges associated with the issuance and repayment of the related debt securities. On June 3, 2003, we issued $200 million of 4.375% Senior Notes. These senior notes mature in June 2013, and interest is payable semi-annually on June 1 and December 1. The proceeds were used to repay a portion of our outstanding commercial paper borrowings, to prepay $100 million of the $350 million unsecured bank loan due November 2004, and to settle interest rate hedges associated with the issuance of the debt securities.

     On August 8, 2003, we filed a shelf registration with the Securities and Exchange Commission, which was declared effective on August 22, 2003. This filing will allow us to sell up to $500 million 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. No debt had been issued under this registration statement as of August 30, 2003.

     All of the repayment obligations under our bank lines of credit may be accelerated and come due prior to the scheduled payment date if AutoZone experiences a change in control (as defined in the agreements) of AutoZone or its Board of Directors or if covenants are breached related to total indebtedness and minimum fixed charge coverage. We expect to remain in compliance with these covenants.

25

Stock Repurchases

     As of August 30, 2003, our Board of Directors had authorized the repurchase of up to $3.3 billion of common stock in the open market. From January 1998 to August 30, 2003, approximately $2.8 billion of common stock had been repurchased. During fiscal 2003, we repurchased $891.1 million of common stock.

     At times in the past, we utilized equity forward agreements to facilitate our repurchase of common stock. There were no outstanding equity forward agreements for share repurchases as of August 30, 2003. At August 31, 2002, we held equity forward agreements, which were settled in cash during fiscal 2003, for the purchase of approximately 2.2 million shares of common stock at an average cost of $68.82 per share. Such obligations under equity forward agreements at August 31, 2002, were not reflected on our balance sheet.

Financial Commitments

     The following table shows AutoZone’s obligations and commitments to make future payments under contractual obligations:

(1)  Long term debt balances represent principal maturities, excluding interest. At August 30, 2003, debt balances due in less than one year of $420.7 million are classified as long term in our Consolidated Financial Statements, as we have the ability and intention to refinance them on a long-term basis.

(2)  Operating lease obligations include related interest.

     The following table shows AutoZone’s other commitments which all have expiration periods of less than one year:

Off-Balance Sheet Arrangements

     The above table reflects the outstanding letters of credit and surety bonds as of August 30, 2003. A substantial portion of the outstanding standby letters of credit (which are primarily

26

renewed on an annual basis) and surety bonds are used to cover reimbursement obligations to our workers’ compensation carriers. There are no additional contingent liabilities associated with them as the underlying liabilities are already reflected in our balance sheet. The letters of credit and surety bonds arrangements have automatic renewal clauses.

     In October 2001,conjunction with our commercial sales program, we offer credit to some of our commercial customers. The receivables related to the credit program are sold to a third party at a discount for cash with limited recourse. AutoZone has recorded a reserve for this recourse. At August 30, 2003, the receivables facility had an outstanding balance of $42.1 million and the balance of the recourse reserve was $2.6 million.

Guarantee and Indemnification Arrangements

     During fiscal 2003, AutoZone adopted the provisions of Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). Effective for interim and annual periods ending after December 15, 2002, FIN 45 elaborates on the disclosures that must be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and indemnities. It also clarifies that a guarantor is required to recognize the fair value of guarantee and indemnification arrangements issued or modified by AutoZone after December 31, 2002, if these arrangements are within the scope of FIN 45. The adoption of FIN 45 did not have a significant impact on AutoZone’s Consolidated Financial Statements.

Critical Accounting Policies

Product Warranties

     Limited warranties on certain products that range from 30 days to lifetime warranties are provided to our customers by AutoZone or the vendors supplying its products. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate. We periodically assess the adequacy of our recorded warranty liability and adjust the amount as necessary.

Litigation and Other Contingent Liabilities

     We have received claims related to and been notified that we are a defendant in a number of legal proceedings resulting from our business, such as employment matters, product liability, general liability related to our store premises and alleged violation of the Robinson-Patman Act (as specifically described in Note M in the Notes to Consolidated Financial Statements). Generally, we calculate contingent loss accruals using our best estimate of our probable and reasonably estimable contingent liabilities, such as lawsuits and our retained liability for insured claims.

27

Vendor Allowances

     AutoZone receives various payments and allowances from its vendors based on the volume of purchases or for services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and promotional funds. Typically these funds are dependent on purchase volumes and advertising plans. The amounts to be received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for AutoZone.

     Rebates and other miscellaneous incentives are earned based on purchases or product sales. These monies are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.

     Certain vendor allowances are used exclusively for promotions and to partially or fully offset certain other direct expenses. Such vendor funding arrangements, that were entered into on or before December 31, 2002, were recognized as a reduction to selling, general and administrative expenses when earned. However, for such vendor funding arrangements entered into or modified after December 31, 2002, AutoZone applied the new guidance pursuant to the Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor” (EITF Issue No. 02-16). Accordingly, all such vendor funds are recognized as a reduction to cost of sales as the inventories are sold.

     The new accounting pronouncement for vendor funding does not impact the way AutoZone runs its business or its relationships with vendors. It does, however, require the deferral of certain vendor funding which is calculated based upon vendor inventory turns. Based on the timing of the issuance of the pronouncement and guidelines, we were precluded from adopting EITF Issue No. 02-16 as a cumulative effect of a change in accounting principle. Our timing and accounting treatment of EITF Issue No. 02-16 was not discretionary.

Impairments

     In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 supersedes Statement No. 121, “Accounting, we evaluate the recoverability of the carrying amounts of long lived assets, such as property and equipment, covered by this standard whenever events or changes in circumstances dictate that the carrying value may not be recoverable. As part of the evaluation, we review performance at the store level to identify any stores with current period operating losses that should be considered for impairment. We compare the Impairmentsum of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” but retains manythe undiscounted expected future cash flows with the carrying amounts of its fundamental provisions. Additionally, SFAS 144 expands the scope of discontinued operations to include more disposal transactions. Theassets.

     Under the provisions of SFAS 144Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), we perform an annual test of goodwill to compare the estimated fair value of goodwill to the carrying amount to determine if any impairment exists. We perform the annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments.

     If impairments are effectiveindicated by either of the above evaluations, the amount by which the carrying amount of the assets exceeds the fair value of the assets is recognized as an impairment

28

loss. Such evaluations require management to make certain assumptions based upon information available at the time the evaluation is performed, which could differ from actual results.

Restructuring and Impairment Charges

     In fiscal 2001, AutoZone recorded restructuring and impairment charges of $156.8 million, including restructuring accruals of $29.6 million. The accrued obligations for AutoZone’srestructuring charges totaled approximately $12.5 million at August 30, 2003, fiscal year. We do not expectand $18.1 million at August 31, 2002. The original charges and activity in the adoption of SFAS 144restructuring accruals is described more fully in Note L in the Notes to have a significant financial impact on our Consolidated Financial Statements.

     During fiscal 2002, we reevaluated remaining excess properties related to the fiscal 2001 impairment charges and determined that several properties could be developed. This resulted in the reversal of accrued lease obligations totaling $6.4 million. We also determined that additional writedowns of $9.0 million were needed to state remaining excess properties at fair value. In Juneaddition, we recognized $2.6 million of gains in fiscal 2002 as a result of closing certain stores associated with the restructuring and impairment charges in fiscal 2001. During fiscal 2003, AutoZone recognized $4.6 million of gains as a result of the disposition of properties associated with the restructuring and impairment charges in fiscal 2001.

     Included in the fiscal 2001 impairment and restructure charges were asset writedowns and contractual obligations aggregating $29.9 million related to the planned sale of TruckPro, our heavy-duty truck parts subsidiary. In December 2001, TruckPro was sold to a group of investors for cash proceeds of $25.7 million and a promissory note. A deferred gain of $3.6 million was recorded as part of the sale due to uncertainties associated with the realization of the gain. During fiscal 2003, the note was paid and certain liabilities were settled. As a result, a total pre-tax gain of $4.7 million was recognized in income during fiscal 2003 as part of operating, selling, general and administrative expenses.

     No other significant gains or charges are anticipated under the fiscal 2001 restructuring plan.

Value of Pension Assets

     At August 30, 2003, the fair market value of AutoZone’s pension assets was $86.7 million, and the related accumulated benefit obligation was $136.1 million. On January 1, 2003, our defined benefit pension plans were frozen. Accordingly, plan participants earn no new benefits under the plan formulas, and no new participants may join the plans. The material assumptions for fiscal 2003 are an expected long-term rate of return on plan assets of 8% and a discount rate of 6%. For additional information regarding AutoZone’s qualified and non-qualified pension plans refer to Note J in the Notes to Consolidated Financial Statements.

29

Recent Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board issued StatementInterpretation No. 146, “Accounting for Costs Associated with Exit46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or Disposal Activities” (SFAS 146). SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and requires that a liabilitydo not have sufficient equity at risk for the cost associated with an exitentity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires the consolidation of certain types of entities in which a company absorbs a majority of another entity’s expected losses or disposal activity be recognized whenresidual returns, or both, as a result of ownership, contractual or other financial interests in the liability is incurred, as opposedother entity. These entities are called variable interest entities. FIN 46 applies immediately to the date of an entity’s commitmentvariable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to an exit plan. TheFebruary 1, 2003, the provisions of SFAS 146 are effective for exit or disposal activities that are initiatedFIN 46 must be applied at the end of periods ending after December 31, 2002. We do15, 2003. The Company is currently evaluating the impact of FIN 46 and does not expect theits adoption of SFAS 146 to have a significant financial impact on ourits Consolidated Financial Statements.

25

Risk Factors

We may not be able to increase sales by the same historic growth rates.

     We have significantly increased our domestic store count in the past five fiscal years, growing from 1,7282,657 stores at August 29, 1998, to 3,219 stores at August 30, 1997, to 3,068 stores at August 31, 2002,2003, an average store count increase per year of 14%4%. We do not plan to continue our store count growth rate at the historic pace. In addition, a portion of our total sales increases each year resultsresulted from increases in sales at existing stores. We cannot provide any assurance that we can continue to open stores at historical rates or increase same store sales.

Our business depends upon qualified employees.

     At the end of fiscal year 2002,2003, our consolidated employee count was approximately 44,200.49,000. We docan not know ifassure that we can continue to hire and retain qualified employees at current wage rates. In the event of increasing wage rates, ifIf we do not increase ourmaintain competitive wages, competitively, our customer service could suffer by reason of a declining quality of our workforce or, alternatively, our earnings wouldcould decrease if we increase our wage rates.

If demand for our products slows, then our business may be materially affected.

     Demand for products sold by our stores depends on many factors. In the short term, it may depend upon:

30

	•		the number of miles vehicles are driven annually, as increased vehicle mileage increases the need for maintenance and repair. Mileage levels may be affected by gas prices and other factors.
	•		the number of vehicles in current service that are seven years old and older, as these vehicles are no longer under the original vehicle manufacturers’ warranty and will need more maintenance and repair than younger vehicles.
	•		the weather, as vehicle maintenance may be deferred during periods of severedisrupted due to catastrophic weather conditions impacting a wide geographic area.
	•		the economy. In periods of rapidly declining economic conditions, both do-it-yourselfDIY and do-it-for-meDIFM customers may defer vehicle maintenance or repair. During periods of expansionary economic conditions, more of our do-it-yourselfDIY customers may pay others to repair and maintain their cars instead of working on their own vehicles or they may purchase new vehicles.
			For the long term, demand for our products may depend upon:
	•		the quality of the vehicles manufactured by the original vehicle manufacturers and the length of the warranty or maintenance offered on new vehicles.
	•		restrictions on access to diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulation.

     For the long term, demand for our products may depend upon:

26

If we are unable to compete successfully against other businesses that sell the products that we sell, we could lose customers and our revenuessales and profits may decline.

     The sale of automotive parts, accessories and maintenance items is highly competitive in many areas, including name recognition, product availability, customer service, store location and price, with many competitors.price. AutoZone competes in both the DIYretail (DIY) and commercial (DIFM) auto parts and accessories markets.

     Competitors include national and regional auto parts chains, independently owned parts stores, wholesalers and jobbers, repair shops, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores, supermarkets, drugstores and home stores that sell aftermarket vehicle parts and supplies, chemicals, accessories, tools and maintenance parts. Although we believe we compete effectively on the basis of customer service, including the knowledge and expertise of our AutoZoners, merchandise quality, selection and availability, product warranty, store layout, location and convenience, and the strength of our AutoZone brand name, trademarks and service marks, some competitors may have competitive advantages, such as greater financial and marketing resources, larger stores with more merchandise, longer operating histories, more frequent customer visits and more effective advertising. If we are unable to continue to develop successful competitive strategies, or if our competitors develop more effective strategies, we could lose customers and our revenuessales and profits may decline.

If we cannot profitably increase market share in the commercial auto parts business, our sales growth may be limited.

     Although we are one of the largest sellers of auto parts in the commercial “do-it-for-me”DIFM market, to increase commercial sales we must compete against automotive aftermarket jobbers and

31

warehouse distributors, in addition to other auto parts retailers that have recently entered the commercial business. Although we believe we compete effectively on the basis of customer service, merchandise quality, selection and availability, and distribution locations, some automotive aftermarket jobbers and warehouse distributors have been in business for substantially longer periods of time than we have, have developed long-term customer relationships and have larger available inventories. We can make no assurances that we can profitably develop new commercial customers or make available inventories required by commercial customers.

If our vendors continue to consolidate, we may pay higher prices for our merchandise.

     Recently, several of our vendors have merged and others have announced plans to merge. Further vendor consolidation could limit the number of vendors from which we may purchase products and could materially affect the prices we pay for these products.

27

Consolidation among our competitors may negatively impact our business.

     Recently, several large auto parts chains have merged. We do not know whatthe impact these mergers will have upon competition in the retail automotive aftermarket. If our merging competitors are able to achieve efficiencies in their mergers, then there may be greater competitive pressures in the markets in which they are strongest.stronger.

War or acts of terrorism or the threat of either may negatively impact availability of merchandise and adversely impact our sales.

     In the event of war,War, or acts of terrorism or the threat of either, are threatened, it may have a negative impact on our ability to obtain merchandise available for sale in our stores. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to bring into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.

     In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers and stores.

32

Reconciliation of Non-GAAP Financial Measures

          “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include the following financial measures not derived in accordance with generally accepted accounting principles (“GAAP”). The following 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.

	•		After Tax Return on Invested Capital (“ROIC”)
	•		Cash Flow Before Share Repurchases

          In addition, the impact of certain non-recurring or infrequent items, that we believe are not indicative of our ongoing operating performance, was excluded in the determination of certain financial measures presented in “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We believe that the resulting non-GAAP financial measures are useful to investors because these measures indicate more clearly our comparative year-to-year operating results. The following non-recurring or infrequent items were all identified as “adjustments” for comparative purposes:

	•		For fiscal 2003, a $4.6 million pre-tax gain as a result of the disposition of properties associated with the fiscal 2001 restructuring and impairment charges
	•		For fiscal 2003, a $10.0 million pre-tax negative impact and reclassification of certain vendor funding to increase operating expenses by $53 million and decrease cost of goods sold by $43 million, both as a result of the adoption of Emerging Issues Task Force Issue No. 02-16 regarding vendor funding
	•		For fiscal 2003, a $4.7 million pre-tax gain associated with the settlement of certain liabilities and the repayment of a note associated with the fiscal 2002 sale of the TruckPro business
	•		For fiscal 2002, the favorable impact of the additional week of the 53 week fiscal year
	•		For fiscal 2001, a $156.8 million pre-tax restructuring and impairment charge

          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 to analyze or compare our operations. Furthermore, our management and Compensation Committee of the Board of Directors 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 accompanying reconciliation tables.

33

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

     The following table reconciles the percentages of after-tax return on invested capital, or “ROIC,” both including and excluding the fiscal 2001 restructuring and impairment charges, to net income. After-tax return on invested capital is calculated as after-tax operating profit (excluding rent) divided by average invested capital (which includes a factor to capitalize operating leases). The ROIC percentages are presented in the “Selected Financial Data.”

(in thousands, except per share and percentage data)

a)		Average debt is equal to the average of our long-term debt measured at the end of each of the 13 fiscal periods in our fiscal year. Long-term debt (in thousands) was $545,067 at August 29, 1998.
b)		Average equity is equal to the average of our stockholders’ equity measured at the end of each of the 13 fiscal periods in our fiscal year. Stockholders’ equity (in thousands) was $1,302,057 at August 29, 1998.
c)		Rent is multiplied by a factor of six to capitalize operating leases in the determination of pretax invested capital.
d)		Average equity at August 25, 2001 increased by $6.8 million as a result of excluding restructuring and impairment charges.
e)		ROIC excluding nonrecurring charges was presented as 14.3% in our Form 10-K for the fiscal year ended August 31, 2002, but has been revised to reflect a rolling 13-period average of debt and equity to conform with our current methodology for calculating ROIC.

34

Reconciliation of Non-GAAP Financial Measure: Cash Flow Before Share Repurchases

     The following table reconciles net cash provided by operating activities to cash flow before share repurchases. Cash flow before share repurchases is defined as the change in debt plus treasury stock purchases. Cash flow before share repurchases is presented in the “Selected Financial Data”.