AutoZone 2010 Annual Report Download - page 135

the future based on changes in market conditions, vendor marketing strategies and changes in the profitability or
sell-through of the related merchandise.
Rebates and other miscellaneous incentives are earned based on purchases or product sales and are accrued ratably
over the purchase or sale of the related product. These monies are generally recorded as a reduction of inventories
and are recognized as a reduction to cost of sales as the related inventories are sold.
For arrangements that provide for reimbursement of specific, incremental, identifiable costs incurred by the
Company in selling the vendors’ products, the vendor funds are recorded as a reduction to selling, general and
administrative expenses in the period in which the specific costs were incurred.
The Company expenses advertising costs as incurred. Advertising expense, net of vendor promotional funds, was
$65.5 million in fiscal 2010, $72.1 million in fiscal 2009, and $86.2 million in fiscal 2008. Vendor promotional
funds, which reduced advertising expense, amounted to $19.6 million in fiscal 2010, $9.7 million in fiscal 2009,
and $2.9 in fiscal 2008.
Cost of Sales and Operating, Selling, General and Administrative Expenses: The following illustrates the
primary costs classified in each major expense category:
Cost of Sales
• Total cost of merchandise sold, including:
o Freight expenses associated with moving merchandise inventories from the Company’s vendors
to the distribution centers and to the retail stores
o Vendor allowances that are not reimbursements for specific, incremental and identifiable costs
• Costs associated with operating the Company’s supply chain, including payroll and benefit costs,
warehouse occupancy costs, transportation costs and depreciation
• Inventory shrinkage
Operating, Selling, General and Administrative Expenses
• Payroll and benefit costs for store and store support employees;
• Occupancy costs of store and store support facilities;
• Depreciation related to retail and store support assets;
• Transportation costs associated with commercial deliveries;
• Advertising;
• Self insurance costs; and
• Other administrative costs, such as credit card transaction fees, supplies, and travel and lodging
Warranty Costs: The Company or the vendors supplying its products provides the Company’s customers limited
warranties on certain products that range from 30 days to lifetime. In most cases, the Company’s vendors are
primarily responsible for warranty claims. 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. These obligations, which are often funded by vendor allowances, are recorded as a
component of accrued expenses. For vendor allowances that are in excess of the related estimated warranty
expense for the vendor’s products, the excess is recorded in inventory and recognized as a reduction to cost of
sales as the related inventory is sold.
Shipping and Handling Costs: The Company does not generally charge customers separately for shipping and
handling. Substantially all the costs the Company incurs to ship products to our stores are included in cost of
sales.
Pre-opening Expenses: Pre-opening expenses, which consist primarily of payroll and occupancy costs, are
expensed as incurred.
Earnings per Share: Basic earnings per share is based on the weighted average outstanding common shares.
Diluted earnings per share is based on the weighted average outstanding common shares adjusted for the effect of
common stock equivalents, which are primarily stock options. There were no stock options excluded from the
diluted earnings per share computation because they would have been anti-dilutive at August 28, 2010. There
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10-K