AutoZone, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Twelve and twenty-four weeks ended February 9, 2019; comparisons are to the periods ended February 10, 2018. The fiscal year ends August 31, 2019. AutoZone operates automotive-parts stores and commercial sales programs, and offers ALLDATA software and online sales. At quarter-end it operated 6,241 stores.
Financial results and liquidity
| Metric | 12 weeks ended Feb. 9, 2019 | 24 weeks ended Feb. 9, 2019 |
|---|---|---|
| Net sales | $2.451 billion; up 1.6% | $5.092 billion; up 1.8% |
| Gross profit / margin | $1.325 billion / 54.1% | $2.743 billion / 53.9% |
| Operating profit | $400.0 million | $887.8 million |
| Net income | $294.6 million | $646.0 million |
| Diluted EPS | $11.49 | $24.97 |
| Operating cash flow | Not presented for this period in the cash-flow statement | $817.1 million, versus $752.3 million |
- Quarterly diluted EPS rose 10.7%; six-month diluted EPS rose 22.5%. The six-month net income increase was $75.5 million.
- For the six months, capital expenditures were $195.8 million; investing cash flow was negative $176.2 million and financing cash flow was negative $661.5 million. Cash declined $22.2 million to $195.7 million.
- At February 9, long-term debt was $5.111 billion, including $1.429 billion in commercial paper. The company reported $1.997 billion available on its $2.0 billion revolving facility and compliance with debt covenants. Cash plus current assets were below current liabilities; vendor payment terms support the company’s high accounts-payable-to-inventory ratio.
- Stockholders’ deficit was $1.594 billion. The company repurchased $847.1 million of stock in the 24-week period; $634.6 million remained authorized at quarter-end.
Changes versus prior comparable periods
- Quarterly sales growth reflected 2.6% domestic same-store sales growth, new domestic stores, and 12.9% growth in domestic commercial sales; prior-year business sales partly offset the increase.
- Six-month domestic same-store sales grew 2.7%, and domestic commercial sales grew 12.1%.
- Gross margin improved from 52.9% to 54.1% for the quarter and from 52.8% to 53.9% for the half year, reflecting higher merchandise margins and the prior-year sale of businesses.
- Operating expenses were lower than prior-year reported expenses, which included $193.2 million of impairment charges for IMC and AutoAnything. Accordingly, the sharp rise in operating profit is not a like-for-like measure of underlying improvement.
- Interest expense increased to $41.4 million for the quarter and $80.4 million for the half year, primarily due to higher average borrowings. Average borrowing rates were 3.1% in both current and comparable periods.
- Quarterly tax expense was $64.0 million, versus a prior-year tax benefit of $123.8 million. The prior period included substantial Tax Reform benefits; the current quarter included $8.8 million of provisional tax benefits and stock-option tax benefits.
Outlook, commentary, risks and unusual items
- No specific sales or earnings guidance was provided. Management expects fiscal 2019 business investment to increase versus fiscal 2018, primarily for stores, supply-chain infrastructure, existing-store enhancements and technology. It expects to fund investment, working capital and repurchases mainly through internal cash generation and available borrowing capacity.
- Management cited seasonality, weather, fuel prices, employment, foreign exchange, interest rates, competition, financing access, cybersecurity, labor availability and supplier costs as factors that could affect results. It noted the average age of the U.S. vehicle fleet remained above 11 years, while miles driven were essentially flat through November 2018.
- Tax Reform accounting included prior-year one-time benefits; the company recorded additional provisional tax benefits in the current quarter. Results are also affected by the absence of prior-year impairment charges and the sale of businesses.
- The company expects adoption of lease accounting in fiscal 2020 to significantly increase lease-related assets and liabilities; the financial-statement impact had not yet been quantified. It did not expect a cash-flow impact.
- Legal matters include a California hazardous-waste investigation and New Jersey groundwater remediation assertions, as well as employment-related lawsuits. The company accrued amounts it considers probable and reasonably estimable and does not expect these matters to be material, but outcomes are uncertain.
- The filing reports no material changes to the risk factors in the latest Form 10-K. The interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- Underlying sales and margin trends excluding prior-year business dispositions and impairment charges.
- How much future EPS growth depends on share repurchases: buybacks contributed $0.65 to quarterly diluted EPS and $1.33 to six-month diluted EPS versus the comparable periods.
- Debt refinancing and interest-rate sensitivity: a one-percentage-point increase in rates on variable-rate debt was estimated to reduce annual pretax earnings and cash flow by $14.3 million.
- Cash conversion and inventory funding, including continued vendor terms and the accounts-payable-to-gross-inventory ratio of 108.5%.
- Final lease-accounting impact, Tax Reform adjustments, and developments in the disclosed environmental and employment proceedings.