AutoZone, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the 12 weeks ended November 19, 2016, the first quarter of fiscal 2017; comparable period ended November 21, 2015. AutoZone sells automotive parts and accessories through stores, commercial programs and online channels, with additional businesses including ALLDATA. It operated 5,835 locations across the U.S., Puerto Rico, Mexico and Brazil. The company notes that quarterly results are not necessarily indicative of full-year performance and that sales are seasonal.
Financial performance and position
| Metric | Q1 FY2017 | Comparable period |
|---|---|---|
| Net sales | $2.468 billion | $2.386 billion |
| Gross profit / margin | $1.302 billion / 52.7% | $1.253 billion / 52.5% |
| Operating profit | $458.9 million | $438.0 million |
| Net income | $278.1 million | $258.1 million |
| Diluted EPS | $9.36 | $8.29 |
| Operating cash flow | $406.5 million | $347.0 million |
| Capital expenditures | $97.9 million | $86.7 million |
Sales rose 3.4%; diluted EPS rose 13.0%. Gross margin improved 0.2 percentage points. SG&A was $842.6 million, or 34.1% of sales, versus $814.9 million, or 34.2%. Net interest expense declined to $33.3 million from $35.0 million. The effective tax rate was 34.7%, down from 35.9%.
At November 19, 2016, cash was $195.5 million, current assets were $4.369 billion and current liabilities were $4.850 billion. Long-term debt was $4.997 billion; total debt before discounts and issuance costs was $5.020 billion, including $1.270 billion in commercial paper. Stockholders’ deficit was $1.895 billion. The company reported $1.958 billion available under its $2.0 billion revolving credit facilities and no outstanding borrowings under those facilities. Operating cash flow less capital expenditures was approximately $308.6 million.
Material changes and management commentary
- Domestic same-store sales grew 1.6%; new domestic stores contributed $40.3 million in sales. Domestic commercial sales increased 6.3%, or $27.3 million.
- Management attributed gross-margin improvement mainly to lower acquisition costs, partly offset by higher supply-chain costs from inventory initiatives. SG&A as a share of sales was broadly flat, with higher domestic store payroll among the offsets to favorable items.
- Stock repurchases totaled $362.6 million for 477,736 shares, compared with $400.1 million in the prior-year quarter. Repurchases since the comparable period increased current-quarter diluted EPS by $0.46, according to management.
- Operating cash flow increased, primarily due to timing of tax payments and higher net income. Capital spending rose mainly because of two domestic distribution centers under construction and a Mexico distribution center completed during the quarter. The company opened 21 net new locations.
- On November 18, 2016, AutoZone increased its multi-year revolving facility commitment from $1.25 billion to $1.6 billion and extended its maturity to November 2021; it reduced the 364-day facility from $500 million to $400 million and extended its expiration to November 2017.
Outlook, risks and unusual items
Management expects fiscal 2017 investment to increase versus fiscal 2016, primarily for new locations, supply-chain infrastructure, existing locations and technology. It continued rolling out more frequent store deliveries and its mega-hub strategy. The filing gives no specific full-year sales or earnings guidance.
Management identifies demand, fuel prices, weather, competition, financing access, economic conditions, labor, construction delays, cybersecurity and supplier costs among forward-looking risks. The business is seasonal; management said failure- and maintenance-related categories represented about 85% of sales. Management reported covenant compliance and an adjusted debt-to-EBITDAR ratio of 2.5:1.
Adoption of updated share-based payment accounting increased quarterly EPS by $0.03 overall; the filing attributes a $0.11 benefit to the lower tax rate and a $0.08 reduction to the diluted-share calculation. Foreign-currency translation reduced other comprehensive income by $40.6 million. The filing discusses environmental and regulatory matters in California and New Jersey, as well as employment-related lawsuits; management did not expect these matters to have a material adverse effect, while noting some outcomes cannot be predicted. Interim financial statements were reviewed by the independent accountant, not audited.
Important facts for investors to verify
- Whether same-store sales, commercial growth and gross-margin improvement persist beyond the quarter.
- Debt and commercial-paper refinancing needs, credit-facility availability, covenant headroom and sensitivity to interest rates.
- Returns and cash requirements from higher capital spending, distribution-center projects, new stores and inventory initiatives.
- The pace and funding of share repurchases and their contribution to per-share growth.
- Developments in the disclosed legal and regulatory matters and any changes to estimated liabilities.
- Effects of seasonality, fuel prices, weather, foreign exchange and the newly adopted share-based payment accounting.