Share-Based Payments

3 Months Ended

Nov. 19, 2022

Share-Based Payments

Share-Based Payments

Note B – Share-Based Payments

AutoZone maintains several equity incentive plans, which provide equity-based compensation to non-employee directors and eligible employees for their service to AutoZone, its subsidiaries or affiliates. The Company recognizes compensation expense for share-based payments based on the fair value of the awards at the grant date. Share-based payments include stock option grants, restricted stock grants, restricted stock unit grants, stock appreciation rights, discounts on shares sold to employees under share purchase plans and other awards. Additionally, directors’ fees are paid in restricted stock units with value equivalent to the value of shares of common stock as of the grant date. The change in fair value of liability-based stock awards is also recognized in share-based compensation expense.

Stock Options:

The Company made stock option grants of 157,113 shares during the twelve week period ended November 19, 2022 and granted options to purchase 163,786 shares during the comparable prior year period. The Company grants options to purchase common stock to certain of its employees under its equity incentive plans at prices equal to the market value of the stock on the date of grant. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date.

The weighted average fair value of the stock option awards granted during the twelve week periods ended November 19, 2022 and November 20, 2021, using the Black-Scholes-Merton multiple-option pricing valuation model, was $760.82 and $462.80 per share, respectively, using the following weighted average key assumptions:

	Twelve Weeks Ended
	November 19,		November 20,
	2022		2021
Expected price volatility	29	%	28	%
Risk-free interest rate	3.8	%	1.1	%
Weighted average expected lives (in years)	5.4		5.6
Forfeiture rate	10	%	10	%
Dividend yield	0	%	0	%

During the twelve week period ended November 19, 2022, 57,092 stock options were exercised at a weighted average exercise price of $725.86. In the comparable prior year period, 47,705 stock options were exercised at a weighted average exercise price of $549.86.

As of November 19, 2022, total unrecognized share-based expense related to stock options, net of estimated forfeitures, was approximately $158.1 million, before income taxes, which we expect to recognize over an estimated weighted average period of 3.5 years.

Restricted Stock Units:

Restricted stock unit awards are valued at the market price of a share of the Company’s stock on the date of grant. Grants of employee restricted stock units vest ratably on an annual basis over a four-year service period and are payable in shares of common stock on the vesting date. Compensation expense for grants of employee restricted stock units is recognized on a straight-line basis over the four-year service period, less estimated forfeitures, which are consistent with stock option forfeiture assumptions. Grants of non-employee director restricted stock units are made and expensed on January 1 of each year, as they vest immediately.

As of November 19, 2022, total unrecognized stock-based compensation expense related to nonvested restricted stock unit awards, net of estimated forfeitures, was approximately $13.7 million, before income taxes, which we expect to recognize over an estimated weighted average period of 3.0 years.

Transactions related to restricted stock units for the twelve weeks ended November 19, 2022 were as follows:

		Weighted-
	Number	Average Grant
	of Shares	Date Fair Value
Nonvested at August 27, 2022	12,731	$	1,223.61
Granted	2,595		2,205.03
Vested	(5,646)		1,074.44
Forfeited	(588)		1,461.94
Nonvested at November 19, 2022	9,092	$	1,580.94

Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $19.0 million for the twelve week period ended November 19, 2022, and $14.3 million for the comparable prior year period.

For the twelve week period ended November 19, 2022, 87,696 stock options were excluded from the diluted earnings per share computation because they would have been anti-dilutive. For the comparable prior year period, 97,942 anti-dilutive stock options were excluded from the dilutive earnings per share computation.

See AutoZone’s Annual Report on Form 10-K for the year ended August 27, 2022 and other filings with the SEC, for a discussion regarding the methodology used in developing AutoZone’s assumptions to determine the fair value of the option awards and a description of AutoZone’s Amended and Restated 2011 Equity Incentive Award Plan, the AutoZone, Inc. 2020 Omnibus Incentive Award Plan and the Director Compensation Program.