AutoZone, Inc. — Fiscal 2023 First Quarter 10-Q
Reporting period: Twelve weeks ended November 19, 2022; comparable period ended November 20, 2021. AutoZone operates automotive parts stores in the U.S., Mexico and Brazil, alongside ALLDATA and e-commerce businesses. Results for this 12-week quarter are not necessarily indicative of the full fiscal year.
Financial highlights
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $3,985.1 million | $3,668.9 million | +8.6% |
| Gross profit | $1,994.6 million | $1,925.2 million | +3.6% |
| Gross margin | 50.1% | 52.5% | -2.4 percentage points |
| Operating profit | $723.0 million | $754.5 million | -4.2% |
| Net income | $539.3 million | $555.2 million | -2.9% |
| Diluted EPS | $27.45 | $25.69 | +6.9% |
| Net cash from operating activities | $793.6 million | $777.9 million | +$15.7 million |
| Capital expenditures | $114.4 million | $102.3 million | +$12.1 million |
Domestic same-store sales rose 5.6%; domestic commercial sales increased 14.9% to approximately $1.0 billion and represented about 28.9% of domestic auto parts sales. Management said sales growth also included $71.6 million from new stores. SG&A was $1,271.6 million, or 31.9% of sales, flat as a percentage of sales year over year. Net interest expense increased to $57.7 million from $43.3 million. The effective tax rate declined to 18.9% from 21.9%, mainly due to a greater tax benefit from exercised stock options.
Balance sheet, debt and liquidity
- At November 19, 2022, cash and cash equivalents were $269.8 million; total assets were $15.3 billion.
- Long-term debt, net of discounts and issuance costs, was $6.33 billion, versus $6.12 billion at fiscal year-end. This included $808.3 million of commercial paper; average borrowing rates were 3.47% for the quarter.
- The company reported $2.2 billion of undrawn revolving-credit availability, before giving effect to commercial paper borrowings, and no revolver borrowings. The facility was extended to November 15, 2027. AutoZone said it was in compliance with debt covenants.
- Commercial paper and $800 million of senior notes due in January and July 2023 were classified as long-term based on management’s stated ability and intent to refinance them using available revolver capacity.
- Operating cash flow exceeded the prior-year quarter; management attributed the increase primarily to reduced inventory growth, net of accounts payable. Financing cash use was $675.7 million, including $900.0 million of share repurchases.
- Accounts payable equaled 131.0% of gross inventory, compared with 129.4% a year earlier. Management noted that reduced supplier payment terms could increase working-capital needs.
Material changes and unusual items
- An $81.0 million non-cash LIFO charge reduced reported gross margin and profit. AutoZone attributed it primarily to rising freight costs and reported that its LIFO credit reserve increased to $96.0 million from $15.0 million at fiscal year-end.
- Excluding the LIFO charge, management reported adjusted operating profit of $804.0 million, up 6.6%; adjusted net income of $601.5 million, up 8.3%; and adjusted diluted EPS of $30.62, up 19.2%. These are non-GAAP measures.
- Share repurchases reduced weighted-average diluted shares and contributed $1.19 to current-quarter diluted EPS, according to management. AutoZone repurchased 392,193 shares for $900.0 million and had $2.7 billion remaining under its $33.7 billion authorization. After quarter-end through December 9, it repurchased another 42,900 shares for $108.0 million.
- Adjusted after-tax ROIC was 54.3% for the trailing four quarters, versus 44.7% a year earlier. Adjusted debt to EBITDAR was 2.2 times, versus 2.0 times.
Outlook, commentary and risks
- No specific full-year sales or earnings guidance is provided. Management expects fiscal 2023 investment to exceed fiscal 2022, primarily for supply-chain initiatives, hubs and distribution centers, expansions, and new stores.
- Management cited inflation, fuel and energy costs, wages, supply-chain disruption, hiring, and broader economic conditions as factors that may affect results. It said failure- and maintenance-related categories were about 86% of sales, with no fundamental category-mix shift year over year.
- Management identified miles driven and the number of older vehicles on the road as long-term market indicators; the filing cited a 12.2-year average U.S. light-vehicle age as of January 1, 2022 and a 1.0% year-over-year increase in U.S. miles driven for September 2022.
- Other disclosed risks include demand changes, financing and credit-market access, interest rates, inventory availability, vendor financing/payment terms, cyber and IT disruption, self-insurance, international-market challenges and the ability to meet ESG goals. A 1-percentage-point increase in rates was estimated to reduce annual pretax earnings and cash flow by $8.1 million at the reported variable-debt level.
- AutoZone reported routine litigation, including employment-related class-action allegations; management did not expect the matters to result in material liabilities. The filing disclosed no material change to most previously reported risk factors, but added risk related to achieving ESG goals.
Important facts for investors to verify
- How much of sales and margin performance persists after separating the $81.0 million LIFO charge and its freight-cost drivers.
- Whether commercial-sales growth and new-store contributions continue, and how commercial mix affects gross margin.
- The refinancing plan and cost for commercial paper and the $800 million of 2023-maturity notes, particularly as borrowing rates change.
- Whether cash generation, supplier payment terms and inventory levels support planned investment and continued large share repurchases.
- How the added investment in supply chain and stores translates into future returns, and whether the company maintains its leverage and covenant position.