Share-Based Payments

3 Months Ended

Nov. 18, 2023

Share-Based Payments

Share-Based Payments

Note K – 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 for 130,723 shares during the twelve week period ended November 18, 2023 and granted options to purchase 157,113 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 or above the market value of the stock on the date of grant. Option-vesting periods range from four to five years, with the vast majority of options vesting ratably over four years. The fair value of each option is amortized into compensation expense on a straight-line basis over the requisite service period, less estimated forfeitures. Beginning with grants made in fiscal 2024, employees who meet the qualified retirement provisions under the AutoZone, Inc. 2020 Omnibus Incentive Award Plan are assumed to have a 0% forfeiture rate. All other employee grants assume a 10% forfeiture rate, which is based on historical experience.

The weighted average fair value of the stock option awards granted during the twelve week period ended November 18, 2023 and November 19, 2022, using the Black-Scholes-Merton multiple-option pricing valuation model, was $913.31 and $760.82 per share, respectively, using the following weighted average key assumptions:

	Twelve Weeks Ended
	November 18,		November 19,
	2023		2022
Expected price volatility	29	%	29	%
Risk-free interest rate	4.8	%	3.8	%
Weighted average expected lives (in years)	5.4		5.4
Forfeiture rate	7	%	10	%
Dividend yield	0	%	0	%

During the twelve week period ended November 18, 2023, and the comparable prior year period, 44,644 and 57,092 stock options, respectively, were exercised at a weighted average exercise price of $931.85 and $725.86, respectively.

As of November 18, 2023, total unrecognized share-based expense related to stock options, net of estimated forfeitures, was approximately $177.9 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 requisite 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 18, 2023, total unrecognized stock-based compensation expense related to nonvested restricted stock unit awards, net of estimated forfeitures, was approximately $12.0 million, before income taxes, which we expect to recognize over an estimated weighted average period of 2.9 years.

Transactions related to restricted stock units for the twelve weeks ended November 18, 2023 were as follows:

		Weighted-
	Number	Average Grant
	of Shares	Date Fair Value
Nonvested at August 26, 2023	8,133	$	1,572.87
Granted	2,173		2,549.04
Vested	(3,741)		1,383.34
Forfeited	(183)		1,933.41
Nonvested at November 18, 2023	6,382	$	2,000.23

Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) for the twelve week period ended November 18, 2023, was $22.9 million and $19.0 million for the comparable prior year period.

For the twelve week periods ended November 18, 2023 and November 19, 2022, 169,798 and 87,696 stock options, respectively, were excluded from the diluted earnings per share computation because they would have been anti-dilutive.

See AutoZone’s Annual Report on Form 10-K for the year ended August 26, 2023 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.