AutoZone, Inc. — Q3 FY2018 Form 10-Q
Reporting period: 12 weeks ended May 5, 2018; year-to-date figures cover 36 weeks. Fiscal 2018 ends August 25, 2018. AutoZone operates automotive parts stores and commercial sales programs, and sells repair information software and products online. At quarter-end it operated 6,092 locations.
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | 36 weeks FY2018 | 36 weeks FY2017 |
|---|---|---|---|---|
| Net sales | $2.660bn | $2.619bn | $7.662bn | $7.376bn |
| Gross profit / margin | $1.423bn / 53.5% | $1.378bn / 52.6% | $4.066bn / 53.1% | $3.885bn / 52.7% |
| Operating profit | $545.8m | $529.6m | $1.220bn | $1.372bn |
| Net income | $366.7m | $331.7m | $937.3m | $847.0m |
| Diluted EPS | $13.42 | $11.44 | $33.75 | $28.86 |
Quarterly operating margin was approximately 20.5% versus 20.2%; year-to-date it was approximately 15.9% versus 18.6%. Year-to-date diluted EPS rose 16.9%, while net income increased 10.7%. Quarter-end cash was $218.4m. For the 36 weeks, operating cash flow was $1.256bn, capital expenditures were $327.1m, and cash decreased by $74.9m.
At May 5, 2018, reported long-term debt was $4.955bn, including commercial paper. The company had $1.997bn available under its $2.0bn revolving credit facility and reported compliance with debt covenants. Current assets were $4.671bn versus current liabilities of $4.918bn. Stockholders’ deficit was $1.362bn. Adjusted debt/EBITDAR, a company-defined non-GAAP measure, was 2.5x, compared with 2.6x a year earlier.
Changes versus prior comparable periods
- Quarterly sales grew 1.6%; domestic same-store sales increased 0.6%, and domestic commercial sales rose 7.3%. New domestic stores contributed $46.5m of sales. Over 36 weeks, sales grew 3.9%, domestic same-store sales rose 1.7%, and domestic commercial sales increased 6.6%.
- Quarterly gross margin improved 90 basis points, reflecting higher merchandise margins and a favorable comparison related to the sale of two businesses. Year-to-date margin increased 40 basis points, primarily from higher merchandise margins.
- Year-to-date operating expenses increased to 37.1% of sales from 34.1%, principally due to $193.2m of impairment charges related to the planned sales of IMC and AutoAnything, as well as occupancy, incentive compensation, hurricane-related and payroll costs.
- Quarterly net income benefited from a lower effective tax rate (27.2% versus 32.8%). The 36-week rate was 14.8% versus 33.3%, primarily reflecting Tax Reform and stock-option tax benefits. Interest expense increased in both periods as borrowing rates rose.
- Year-to-date share repurchases were $927.2m; 1.424m shares were repurchased. The board increased authorization by $1.0bn, leaving $896.5m available at May 5. A further 258,761 shares were repurchased for $167.5m after quarter-end.
Outlook, commentary and risks
- No formal revenue or earnings guidance is provided. Management expected FY2018 investment to continue at a rate consistent with FY2017, focused on new locations, supply chain, existing stores and technology.
- Management expects a one-time pretax pension-plan termination charge of approximately $130m–$140m in Q4 FY2018; about $20m–$30m is expected to require cash funding. The plans’ termination process is underway.
- Management cited miles driven and the number of vehicles at least seven years old as long-term demand indicators; the U.S. light-vehicle fleet’s average age continued to trend favorably. Sales are seasonal, and weather can affect short-term sales mix.
- Principal disclosed uncertainties include product demand, competition, fuel and interest rates, weather, financing access, hiring and retention, construction delays, cybersecurity, regulation and supplier raw-material costs. Management said risk factors had not materially changed from the prior annual report.
- Tax Reform accounting remained provisional, including the transition-tax estimate of $25.4m; the company said estimates could change as analysis and regulatory guidance develop. Adoption of the lease standard is expected to significantly increase lease-related balance-sheet assets and liabilities; the impact was not yet quantified.
- The company completed sales of AutoAnything and IMC during the quarter after recording the impairment charges. It retained liability for a California Air Resources Board lawsuit related to a formerly owned subsidiary; management could not predict the outcome but did not expect a material adverse effect. Other disclosed legal matters were also not expected by management to be material.
Important facts for investors to verify
- Whether sales and same-store sales growth improve, particularly in domestic commercial sales, and how new-store openings contribute.
- Whether gross-margin gains persist and operating expenses normalize after the $193.2m impairment and other cost pressures.
- The final pension termination charge, cash funding requirement and timing of plan distributions.
- Tax Reform measurement-period adjustments and the final tax rate, including the effects of stock-option tax benefits.
- Debt refinancing and liquidity as 2018 and 2019 notes mature, along with borrowing costs and covenant compliance.
- Subsequent share repurchases and the company’s capital allocation relative to investment needs and leverage.
- The filing’s interim financial statements were reviewed by the independent auditor, not audited; results for the interim periods are not necessarily indicative of full-year results.