AutoZone, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Twelve weeks ended February 13, 2021; year-to-date (YTD) figures cover 24 weeks. Comparisons are with the periods ended February 15, 2020. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Business context
AutoZone retails and distributes automotive parts and accessories in the U.S., Mexico and Brazil, with 6,625 stores at quarter-end. It also operates ALLDATA software and e-commerce businesses. The company does not provide vehicle repair or installation services. Its first three fiscal quarters are 12 weeks each; results to date are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 FY2021 | Q2 FY2020 | YTD FY2021 | YTD FY2020 |
|---|---|---|---|---|
| Net sales | $2,910.8m | $2,513.7m | $6,065.1m | $5,306.7m |
| Gross profit | $1,559.4m | $1,366.1m | $3,235.0m | $2,867.1m |
| Gross margin | 53.6% | 54.3% | 53.3% | 54.0% |
| Operating profit | $481.8m | $407.9m | $1,097.0m | $908.0m |
| Net income | $345.9m | $299.3m | $788.4m | $649.6m |
| Diluted EPS | $14.93 | $12.39 | $33.59 | $26.70 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,039.8m | $651.6m |
Q2 sales rose 15.8%, operating profit 18.1%, net income 15.6% and diluted EPS 20.5%. YTD sales increased 14.3%, net income 21.4% and diluted EPS 25.8%. Domestic same-store sales grew 15.2% in Q2 and 13.6% YTD; domestic commercial sales increased 14.7% in Q2 and 13.2% YTD. Commercial sales were approximately 22% of total Q2 sales.
Q2 SG&A was $1,077.6m, or 37.0% of sales, versus $958.1m, or 38.1%. Net interest expense was $46.0m, versus $44.3m; the effective tax rate was 20.6%, versus 17.7%. YTD SG&A was $2,138.0m, or 35.3% of sales, versus $1,959.2m, or 36.9%; net interest expense was $92.2m versus $88.1m, and the tax rate was 21.5% versus 20.8%.
At February 13, cash and cash equivalents were $1,026.2m, down from $1,750.8m at fiscal year-end. Merchandise inventory was $4,736.8m; current liabilities were $6,804.3m. Total debt carrying value was approximately $5,516.4m, including $250m due in April 2021; operating lease liabilities totaled approximately $2,819.5m. The company reported $2,748m available under its $2,750m revolving credit agreements and no revolver borrowings. Adjusted debt to EBITDAR, a non-GAAP measure, was 2.0x, versus 2.6x a year earlier.
Material changes and capital allocation
- Q2 gross margin declined 0.7 percentage points. Management attributed the decrease to increased supply-chain costs, pricing initiatives, accelerated loyalty-program participation and sales mix.
- SG&A as a share of sales improved through sales leverage, partly offset by pandemic-related expenses. The company recorded $39.9m of emergency time-off benefits and other COVID-19 costs in Q2 and $44.9m YTD.
- YTD operating cash flow increased by $388.2m, which management attributed primarily to favorable inventory and accounts-payable changes and higher earnings. YTD capital expenditures rose to $238.6m from $190.6m; the company opened 76 net new stores versus 50.
- YTD financing cash outflow was $1,540.9m, including $1,578.3m of share repurchases. YTD buybacks covered 1.336m shares; $717.6m remained under the authorization at quarter-end. A further 169,396 shares costing $203.0m were repurchased after quarter-end.
- The company repaid its $250m 2.5% notes on March 15, 2021. It terminated its unused $750m 364-day credit facility effective February 22, 2021, stating the additional liquidity was no longer necessary.
Outlook, commentary and risks
Management said sales remained elevated compared with pre-pandemic levels and believed government stimulus had benefited customers; it expected recently approved additional stimulus to further benefit customers and sales. It provided no specific numerical sales or earnings guidance in the supplied filing text. Management said the longer-term effects of COVID-19 were unknown and could cause fluctuations in demand, store hours and workforce availability. U.S. miles driven fell 9.9% from the start of the fiscal year through December 2020 compared with the prior-year period, while the average age of the U.S. vehicle fleet remained above 11 years.
Other disclosed risks include competition, economic conditions, inflation, fuel and supplier costs, supply-chain disruption, financing access and credit-rating changes, weather, cyber and information-system interruptions, hiring and retention, international-market challenges, and public-health developments. The company reported compliance with debt covenants and expected to remain compliant. Management did not believe the disclosed employment-related class-action litigation would result in material liabilities. The independent accountant performed an interim review, not an audit, and reported no material modifications were indicated.
Important facts for investors to verify
- Whether sales growth persists as pandemic effects and stimulus support change, and how lower miles driven affect demand.
- Whether gross-margin pressure from supply-chain costs, pricing, loyalty participation and mix continues.
- How operating cash flow, inventory investment and supplier payment terms evolve; accounts payable equaled 113.0% of gross inventory, versus 105.7% a year earlier.
- Debt repayment and refinancing needs, available revolver capacity, covenant compliance and the effect of continued large share repurchases on cash and leverage.
- The ultimate costs, if any, of pandemic-related employee benefits, litigation and other contingencies; the filing does not provide a clear quantified estimate for potential litigation exposure.