AutoZone, Inc. — FY2020 Form 10-K
Business context and reporting period. AutoZone retails and distributes automotive replacement parts and accessories, with commercial, e-commerce and ALLDATA software operations; it does not provide vehicle repair or installation services. The fiscal year ended August 29, 2020 comprised 52 weeks, compared with 53 weeks in FY2019. At year-end, the company operated 6,549 stores in the U.S., Mexico and Brazil.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $12.632 billion | $11.864 billion |
| Gross profit / margin | $6.771 billion / 53.6% | $6.365 billion / 53.7% |
| Operating profit / margin | $2.418 billion / 19.1% | $2.216 billion / 18.7% |
| Net income / net margin | $1.733 billion / 13.7% | $1.617 billion / 13.6% |
| Diluted EPS | $71.93 | $63.43 |
| Cash from operating activities | $2.720 billion | $2.129 billion |
Domestic comparable-store sales rose 7.4%; domestic commercial sales increased 6.4% and represented 21.6% of total sales. Capital expenditures were $457.7 million, and cash flow before share repurchases and changes in debt, a company-defined non-GAAP measure, was $2.185 billion.
Year-end cash and cash equivalents were $1.751 billion, versus $176.3 million a year earlier. Long-term debt was $5.513 billion, versus $5.206 billion; the company reported no borrowings under its revolving credit facilities and $2.748 billion of availability under them. Working capital was positive $528.8 million, compared with a deficit of $483.5 million. The balance sheet also included $2.725 billion of operating lease liabilities and $223.4 million of finance lease liabilities. Adjusted debt to EBITDAR was 1.9x, a non-GAAP measure presented net of $1.6 billion of excess cash.
Material changes and unusual items
- Sales grew 6.5% and net income 7.2% despite one fewer fiscal week; FY2019 included an additional week. Diluted EPS increased 13.4%, supported in part by a lower weighted-average share count; repurchases contributed an estimated $1.59 per share.
- Gross margin declined 5 basis points, primarily due to merchandise mix. SG&A increased in dollars but declined as a share of sales, to 34.5% from 35.0%, reflecting sales leverage partly offset by pandemic-related costs.
- AutoZone recorded $83.9 million of pre-tax COVID-19 expenses, including enhanced employee time-off benefits and protective supplies. Sales initially weakened, then rebounded to record levels, according to management.
- Share repurchases were temporarily suspended during FY2020 to conserve liquidity; 826,000 shares were repurchased for $930.9 million over the year. Repurchases resumed in FY2021’s first quarter; subsequent to year-end, the company repurchased 269,795 shares for $314.4 million.
- FY2020 included adoption of lease accounting standard ASC 842, adding operating lease right-of-use assets and liabilities to the balance sheet; comparative periods were not restated.
Fourth quarter: The 16-week period ended August 29, 2020 reported sales of $4.546 billion, operating profit of $1.018 billion, net income of $740.5 million and diluted EPS of $30.93. The comparable FY2019 quarter was 17 weeks, so period length should be considered when comparing results.
Outlook, risks and contingencies
No formal sales or earnings guidance is provided in the supplied filing text. Management expected FY2021 investment in the business to increase from FY2020, principally for new stores, supply-chain infrastructure, existing-location improvements and technology; FY2020 construction and capital spending had been delayed by COVID-19. The company restarted buybacks but said future repurchase levels would depend on business conditions.
Management cited continued uncertainty around the pandemic’s duration and effects on demand, miles driven, employee availability, store operations, sourcing and new-store openings. Other prominent risks include competitive and online pricing pressures, wage and hiring costs, supplier concentration and import/tariff disruptions, cyber and IT incidents, self-insurance estimate volatility, foreign exchange exposure and access to debt markets. U.S. miles driven fell 8.8% from the start of FY2020 through July 2020 versus the prior-year period, while the average vehicle age was 11.9 years.
The company disclosed ordinary-course litigation, including employee wage-and-hour and termination claims, which it did not believe would result in material liabilities. It also contested New Jersey environmental cost assertions; management did not expect the matter to be material. The financial-statement auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Key facts for investors to verify
- Whether the exceptional sales and cash-flow growth persists as pandemic effects, stimulus and customer behavior change; assess comparable sales alongside miles driven.
- How merchandise mix, pricing and labor-cost inflation affect gross margin and operating leverage.
- Cash use and leverage after the large year-end cash build: distinguish gross debt from the company’s cash-adjusted, non-GAAP leverage measures and account for lease obligations.
- FY2021 capital spending, store-opening pace and the amount and funding of resumed share repurchases.
- Potential changes in self-insurance reserves, supplier payment terms, pandemic-related costs and disclosed legal or environmental matters.