AutoZone, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Twelve weeks ended February 15, 2020; year-to-date figures cover 24 weeks. Comparisons are with the periods ended February 9, 2019. Amounts below are in millions unless stated otherwise.
Business context and results
AutoZone operates automotive parts retail and distribution businesses in the U.S., Mexico and Brazil, with 6,461 stores, alongside ALLDATA and e-commerce operations. It does not provide vehicle repair or installation services.
| Metric | Q2 FY2020 | Q2 FY2019 | 24 weeks FY2020 | 24 weeks FY2019 |
|---|---|---|---|---|
| Net sales | $2,513.7 | $2,450.6 | $5,306.7 | $5,092.3 |
| Gross profit / margin | $1,366.1 / 54.3% | $1,325.1 / 54.1% | $2,867.1 / 54.0% | $2,742.6 / 53.9% |
| Operating profit | $407.9 | $400.0 | $908.0 | $887.8 |
| Net income | $299.3 | $294.6 | $649.6 | $646.0 |
| Diluted EPS | $12.39 | $11.49 | $26.70 | $24.97 |
- Quarterly sales rose 2.6%; new stores contributed $56.5 million, while domestic same-store sales declined 0.8%. Domestic commercial sales increased 8.2% to $556.9 million.
- For the 24-week period, sales increased 4.2%, domestic same-store sales rose 1.4%, and domestic commercial sales rose 11.0% to $1.178 billion.
- Gross margin improved slightly, primarily from supply-chain leverage. SG&A was 38.1% of quarterly sales versus 37.7% a year earlier, with deleverage primarily from domestic store payroll; the 24-week ratio was 36.9% versus 36.4%.
- Quarterly net income increased 1.6% and 24-week net income increased 0.6%. Diluted EPS growth was aided by fewer shares outstanding: management attributed $0.55 of quarterly EPS and $1.09 of 24-week EPS to repurchases since the respective prior-year period.
Cash flow, balance sheet and liquidity
- Year-to-date operating cash flow was $651.6 million, down from $817.1 million, primarily due to unfavorable inventory changes net of accounts payable. Investing cash outflow was $174.9 million; capital expenditures were $190.6 million.
- Financing cash outflow was $502.8 million, including $764.8 million of treasury-stock purchases, partly offset by $242.7 million of net commercial-paper proceeds. Cash ended at $153.0 million, down from $176.3 million at August 31, 2019.
- At February 15, 2020, long-term debt carrying value was $5.451 billion, including $1.273 billion of commercial paper. The company reported $1.997 billion available under its $2.0 billion revolving facility and stated it had the ability and intent to refinance commercial paper and $500 million of notes due November 2020 on a long-term basis.
- Adjusted debt to EBITDAR was 2.6:1 versus 2.5:1 a year earlier. The company reported compliance with debt covenants. A 1 percentage-point rise in rates on variable-rate debt would have an estimated $12.7 million annual adverse pretax earnings and cash-flow impact.
- Accounts payable equaled 105.7% of gross inventory, versus 108.5% a year earlier. Management expects to fund investment, working capital and repurchases mainly with internally generated cash and available borrowing capacity, with possible new borrowings.
Changes, outlook and risks
- AutoZone adopted the new lease accounting standard on September 1, 2019. It recognized $2.579 billion of operating-lease right-of-use assets and $2.729 billion of operating-lease liabilities at quarter-end; total lease liabilities, including finance leases, were $2.925 billion. Adoption did not materially affect income, cash flows or covenant compliance, but increased reported balance-sheet assets and liabilities.
- Management expected fiscal 2020 investment to exceed fiscal 2019, directed mainly to new stores, supply-chain infrastructure, technology and existing-store improvements. The filing provides no numerical earnings or sales guidance and cautions that interim results are not necessarily indicative of full-year results.
- COVID-19 had not caused significant disruption as of the filing, but management described substantial uncertainty and potential adverse effects on demand, store hours, workforce availability and merchandise sourcing. Contingency plans for potentially at-risk merchandise categories were being reviewed.
- Management cited domestic store payroll, economic conditions, fuel costs, weather, competition, consumer demand, supply-chain disruption, tariffs, cyber and IT risks, and financing access among factors that could affect results. The business is seasonal; sales are generally highest February through September and lowest in December and January.
- Legal proceedings include employee wage-and-hour and termination claims, plus a New Jersey groundwater-remediation matter. Management did not believe these matters would result in material liabilities; the remediation matter’s potential additional cost was not ascertainable.
- The board increased the repurchase authorization by $1.25 billion in October 2019. About $961.9 million remained at February 15, and the company repurchased a further $166.1 million of shares after quarter-end. Adjusted after-tax ROIC was 35.3%, compared with 33.5% a year earlier.
Investor verification priorities
- Track whether domestic same-store sales recover and whether commercial-sales growth offsets pressure in other channels.
- Assess the persistence of payroll expense deleverage and supply-chain benefits on margins.
- Monitor operating cash flow, inventory and vendor-payment terms, particularly the decline in cash generation versus the prior year.
- Review debt, refinancing capacity, leverage and the effect of interest-rate changes; consider lease obligations alongside reported debt.
- Follow COVID-related demand, staffing and sourcing impacts, as well as planned capital spending and share repurchases.
- Confirm progress and potential exposure in the disclosed litigation and New Jersey remediation proceedings.
The interim financial statements were reviewed by Ernst & Young LLP, not audited; the accountant reported that it was not aware of material modifications needed for GAAP conformity.