AutoZone, Inc. — FY2014 Form 10-K
Business context and reporting period. AutoZone is a retailer and distributor of automotive replacement parts and accessories, with DIY retail, commercial sales, and online businesses. It operated 5,391 stores in the U.S., Puerto Rico, Mexico, and Brazil at August 30, 2014; 3,845 domestic stores had commercial programs. The fiscal year ended August 30, 2014 and comprised 52 weeks; FY2013 comprised 53 weeks. The filing is an annual report, not a standalone fourth-quarter filing.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $9.475 billion | $9.148 billion |
| Gross profit / margin | $4.935 billion / 52.1% | $4.741 billion / 51.8% |
| Operating profit / margin | $1.830 billion / 19.3% | $1.773 billion / 19.4% |
| Net income | $1.070 billion | $1.016 billion |
| Diluted EPS | $31.57 | $27.79 |
| Operating cash flow | $1.341 billion | $1.415 billion |
| Capital expenditures | $438.1 million | $414.5 million |
| Total debt | $4.344 billion | $4.187 billion |
| Cash and cash equivalents | $124.5 million | $142.2 million |
FY2014 sales rose 3.6% as reported; excluding FY2013’s extra week, sales growth was 5.6%. Domestic same-store sales increased 2.8% (FY2013: 0.0%). Net income increased 5.2%; diluted EPS increased 13.6%, supported in part by share repurchases. Gross margin improved 30 basis points, while SG&A rose to 32.8% of sales from 32.4%. The effective tax rate was 35.7%, versus 36.0%.
Fourth-quarter FY2014, a 16-week period, produced sales of $3.050 billion and net income of $373.7 million, compared with $3.095 billion and $371.2 million in FY2013’s 17-week quarter; the periods are not directly comparable.
Current assets were $3.581 billion and current liabilities $4.541 billion, a working-capital deficit of $960.5 million. Inventory was $3.140 billion, with accounts payable of $3.609 billion. Management cited supplier payment terms and an accounts-payable-to-inventory ratio of 114.9%. The revolving credit facility had $1.213 billion available; the reported interest-coverage ratio was 4.95:1 against a 2.50:1 minimum. Adjusted debt to EBITDAR was 2.5x. Stockholders’ deficit was $1.622 billion.
Material changes and capital allocation
- Lower product acquisition costs and lower shrink improved gross margin; higher supply-chain costs from inventory initiatives partly offset the benefit.
- Higher store payroll and planned information-system investment contributed to increased SG&A as a share of sales. Net interest expense declined to $167.5 million from $185.4 million, reflecting lower borrowing rates despite higher average borrowings.
- Operating cash flow declined by $73.8 million, primarily due to inventory growth net of payables, partly offset by higher net income. Cash flow before share repurchases and debt changes was $924.7 million, versus $1.008 billion.
- The company opened 190 stores and ended the year with 5,391, up from 5,201. Commercial programs expanded to 3,845 domestic stores from 3,421.
- AutoZone repurchased $1.099 billion of shares in FY2014, versus $1.387 billion in FY2013. The board raised cumulative authorization to $14.9 billion, with $869.2 million remaining at year-end. The company pays no common dividend.
Outlook, risks, and unusual items
Management expected FY2015 investment to increase, principally for new stores, existing-store improvements, supply-chain infrastructure, and the IMC acquisition. It anticipated relying primarily on internally generated funds and borrowing capacity for capital spending, working capital, and repurchases. No specific revenue or earnings guidance was provided. Management cited miles driven and the number of vehicles at least seven years old as key long-term demand indicators; it also noted economic uncertainty and unpredictable fuel prices.
- After year-end, AutoZone acquired Interamerican Motor Corporation (IMC), a 17-branch distributor specializing in European and Asian replacement parts, for approximately $80 million. The September 27, 2014 transaction was financed with commercial paper.
- Key exposures include competition and pricing pressure, macroeconomic conditions, fuel prices and weather, product availability and quality, recruiting and retention, store expansion and supply-chain execution, cybersecurity and systems interruptions, and credit-market access. A 1 percentage-point increase in variable interest rates was estimated to reduce pretax earnings and cash flow by about $8.9 million.
- Legal matters include a disputed New Jersey groundwater/vapor-intrusion remediation claim, a California subpoena concerning hazardous-waste handling, and employment-related lawsuits. The company said it did not expect the matters to be material; the California inquiry’s outcome could not be predicted.
- No goodwill or trade-name impairment was recorded in FY2014. FY2013 included AutoAnything goodwill and trade-name impairment charges of $18.3 million and $4.1 million, offset by a $23.3 million reduction in contingent consideration liability.
- Management and the auditor reported effective internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether underlying sales and same-store sales trends remain healthy after adjusting comparisons for FY2013’s extra week.
- Whether inventory expansion improves product availability and sales without weakening inventory turnover, cash conversion, or supplier payment terms.
- How planned FY2015 capital spending, new-store growth, and the IMC acquisition affect returns on invested capital and leverage.
- Debt refinancing capacity, upcoming maturities, borrowing costs, and continued compliance with credit-facility covenants.
- Progress and potential costs or liabilities related to the environmental and employment matters, plus execution of cybersecurity and information-system controls.