AutoZone, Inc. — Q1 FY2020 Form 10-Q
Business context and period. AutoZone operates automotive-parts retail and distribution businesses, with 6,433 stores in the U.S., Mexico and Brazil. The filing covers the 12 weeks ended November 23, 2019; comparisons are with the 12 weeks ended November 17, 2018. Results for this seasonally weaker quarter are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2020 | Prior period | Change |
|---|---|---|---|
| Net sales | $2.793 billion | $2.642 billion | +5.7% |
| Gross profit / margin | $1.501 billion / 53.7% | $1.417 billion / approximately 53.6% | Margin relatively flat |
| Operating profit | $500.0 million | $487.8 million | +2.5% |
| Net income | $350.3 million | $351.4 million | -0.3% |
| Diluted EPS | $14.30 | $13.47 | +6.2% |
| Operating cash flow | $447.1 million | $449.2 million | Down $2.1 million |
| Capital expenditures | $101.4 million | $98.2 million | Increased |
- Domestic same-store sales rose 3.4%; domestic commercial sales grew 13.6%. Sales also benefited from new stores. The company opened 22 net new stores, compared with 16 a year earlier.
- SG&A was $1.001 billion, or 35.8% of sales, versus $929.7 million, or 35.2%. Management cited deleverage, primarily from domestic store payroll and benefits.
- Net interest expense increased to $43.7 million from $39.0 million, mainly due to higher average borrowings. The effective tax rate rose to 23.2% from 21.7%, principally because the tax benefit from exercised stock options fell to $1.5 million from $11.2 million.
- EPS growth was supported by share repurchases: management estimated repurchases since the prior-year comparable quarter added $0.70 to current-quarter diluted EPS.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $158.1 million at November 23, 2019. Operating activities provided $447.1 million; investing activities used $90.7 million and financing activities used $375.8 million. Treasury-stock purchases were $450.0 million.
- Long-term debt was $5.287 billion, including $1.110 billion of commercial paper. The company had $1.997 billion available under its $2.0 billion revolving credit facility and reported compliance with debt covenants.
- Adjusted debt to EBITDAR, a company-defined non-GAAP measure, was 2.5:1, unchanged from the prior-year comparison. Adjusted after-tax ROIC was 35.5%, up from 33.7%.
- The board added $1.25 billion to the repurchase authorization; $1.277 billion remained at quarter-end. After quarter-end, the company repurchased another $120.0 million of shares.
- Adoption of lease accounting on September 1, 2019 added approximately $2.5 billion of operating lease right-of-use assets and $2.7 billion of operating lease liabilities at adoption. At quarter-end, total lease liabilities were $2.935 billion. Prior periods were not restated, limiting balance-sheet comparability.
Outlook, risks and unusual items
- No specific sales, earnings or EPS guidance is provided in the filing. Management expects FY2020 investment to exceed FY2019 levels, primarily for new stores, technology, supply-chain infrastructure and store improvements. It expects to rely mainly on internally generated funds and borrowing capacity for investment, working capital and repurchases.
- Management identified miles driven and the number of older vehicles as longer-term market indicators; U.S. miles driven were up 1.7% through September 2019, and the vehicle fleet’s average age remained above 11 years. Sales are seasonal, generally strongest February through September and weakest in December and January.
- Disclosed risk factors include demand and economic conditions, competition, weather, fuel and labor costs, financing access and credit ratings, tariffs and supplier costs, cybersecurity and IT disruption, and international-market challenges. The company reported no material change to previously disclosed risk factors.
- Legal matters include employee wage-and-hour and termination lawsuits and a New Jersey groundwater-contamination dispute. Management did not expect these matters to create material liabilities, but the additional remediation costs in New Jersey could not be determined.
- The interim statements were reviewed, not audited, by the independent accounting firm, which reported no material modifications needed. Management concluded disclosure controls were effective.
Investor items to verify
- Whether same-store and commercial-sales growth persists, and whether higher store payroll and benefits continue to pressure operating margins.
- How tax benefits from stock-option exercises affect year-over-year net income and EPS comparisons.
- Cash generation relative to store, technology and supply-chain investment, continued buybacks, and commercial-paper refinancing needs.
- Debt and lease obligations, covenant headroom, and the effect of lease accounting when comparing periods.
- Developments in the New Jersey remediation matter and employee litigation, including any change in expected costs.