AutoZone, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended February 14, 2015. Results cover 12 weeks for the quarter and 24 weeks year to date (YTD), compared with the corresponding 2014 periods. AutoZone operates automotive-parts retail and distribution locations, plus ALLDATA and e-commerce businesses; it reported 5,476 Auto Parts Stores locations and 5,042 U.S. stores, including Puerto Rico. Its business is seasonal, with sales generally highest February through September.
Financial performance
| Metric | 12 weeks ended Feb. 14, 2015 | 12 weeks ended Feb. 15, 2014 | 24 weeks ended Feb. 14, 2015 | 24 weeks ended Feb. 15, 2014 |
|---|---|---|---|---|
| Net sales | $2,143.7 million | $1,990.5 million | $4,403.9 million | $4,084.1 million |
| Gross profit / margin | $1,120.0 million / 52.2% | $1,037.0 million / 52.1% | $2,296.7 million / 52.2% | $2,122.7 million / 52.0% |
| Operating profit | $361.3 million | $337.3 million | $769.8 million | $721.1 million |
| Net income | $211.7 million | $192.8 million | $450.0 million | $410.9 million |
| Diluted earnings per share | $6.51 | $5.63 | $13.78 | $11.92 |
| Net interest expense | $34.5 million | $39.5 million | $71.6 million | $81.9 million |
Quarterly sales rose 7.7%; management cited 3.6% domestic same-store sales growth, new stores, increased commercial programs, and IMC sales. YTD sales increased 7.8%. Quarterly and YTD diluted EPS each increased 15.6%. Stock repurchases contributed an estimated $0.31 to quarterly and $0.60 to YTD diluted EPS growth, respectively.
SG&A was $758.8 million, or 35.4% of sales, for the quarter, versus $699.7 million, or 35.2%; YTD it was $1,526.9 million, or 34.7%, versus $1,401.7 million, or 34.3%. Higher incentive compensation, self-insured medical costs, and IMC weighed on expense ratios. A favorable $5.4 million credit-card litigation settlement partly offset these costs. Gross-margin improvement reflected higher merchandise margins, partly offset by IMC.
Cash flow, debt, and liquidity
For the 24 weeks, operating cash flow was $476.5 million, down from $508.0 million. Investing used $271.5 million, including $186.2 million of capital expenditures and $75.7 million for IMC. Financing used $174.7 million, including $325.7 million of share repurchases; net commercial-paper proceeds were $604.5 million. Cash at February 14, 2015 was $151.5 million. Operating cash flow less capital expenditures was approximately $290.4 million, compared with $348.0 million a year earlier.
Total debt was $4.448 billion, compared with $4.344 billion at August 30, 2014; long-term debt on the balance sheet was $4.361 billion. Commercial paper was $1.498 billion, and short-term borrowings were $87.2 million. The company had $1.711 billion available under $1.750 billion of revolving facilities and stated it had the ability and intent to refinance certain obligations on a long-term basis. Adjusted debt to EBITDAR was 2.5:1, unchanged year over year. Stockholders’ deficit was $1.469 billion.
Changes, outlook, and risks
- AutoZone acquired IMC, a U.S. import-parts distributor, effective September 27, 2014, for $75.7 million net of cash. The preliminary purchase allocation included $16.2 million of goodwill and $8.3 million of intangibles.
- Management expected fiscal 2015 investment to exceed fiscal 2014, primarily for new stores, existing-store improvements, supply-chain infrastructure, technology, and IMC. No specific full-year sales or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of the fiscal year.
- Management said lower gasoline prices and earlier tax refunds supported quarter sales, but noted that fuel prices, refund timing, weather, consumer conditions, and miles driven are uncertain. It was testing higher hub and store inventory and different delivery frequencies.
- Market risks include variable-rate debt: $1.498 billion outstanding; a one-percentage-point rate increase was estimated to reduce annual pretax earnings and cash flow by $15.0 million. Management reported covenant compliance.
- Contingencies include New Jersey groundwater and potential off-site vapor-intrusion remediation, with potential costs not currently quantifiable; the company did not expect material effects and may qualify for reimbursement of up to 75% of eligible costs. A California hazardous-waste subpoena and employment-related lawsuits were also disclosed; outcomes are uncertain.
- Management attributed a $58.9 million YTD foreign-currency translation loss to other comprehensive loss. The filing states there were no material changes to previously disclosed risk factors. Interim financial statements received an accountant’s review, not an audit.
Key facts for investors to verify
- Whether same-store sales momentum and higher merchandise margins persist after temporary fuel-price and tax-refund benefits.
- How inventory growth, vendor payment terms, and slower inventory turns affect operating cash flow and liquidity.
- Debt refinancing capacity, commercial-paper exposure, interest-rate sensitivity, and planned share repurchases relative to investment needs.
- Final IMC purchase-price allocation and the acquisition’s contribution to sales, margins, and returns.
- Developments in the environmental matter, California subpoena, and employment litigation, including any change in expected costs.