AutoZone, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first 24 weeks ended February 11, 2012; comparable periods ended February 12, 2011. AutoZone operates automotive-parts stores in the U.S. and Mexico, with related software and e-commerce businesses. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | 12 weeks ended Feb. 11, 2012 | 24 weeks ended Feb. 11, 2012 |
|---|---|---|
| Net sales | $1.804 billion, up 8.6% | $3.728 billion, up 8.0% |
| Gross profit / margin | $926.2 million / 51.3% | $1.910 billion / 51.2% |
| Operating profit | $300.7 million | $641.6 million |
| Net income | $166.9 million | $358.1 million |
| Diluted EPS | $4.15, up 24.4% | $8.83, up 24.1% |
| Operating cash flow | Not presented for this period | $461.2 million, versus $441.1 million |
- Quarter domestic same-store sales rose 5.9%; year-to-date comparable-store sales rose 5.2%. Growth reflected higher transaction values, partly offset by fewer transactions, and sales from new stores.
- Quarter gross margin improved 0.4 percentage points, mainly from lower shrink. Year-to-date gross margin rose 0.4 points, reflecting lower shrink and distribution-cost leverage. Quarter SG&A was 34.7% of sales versus 34.6%; year-to-date was 34.0%, essentially unchanged.
- Cash and equivalents were $103.2 million at February 11, 2012. Current assets were $2.909 billion against current liabilities of $3.517 billion.
- Capital expenditures were $132.4 million year to date; investing cash flow was a $129.2 million outflow. Financing cash flow was a $326.3 million outflow, including $482.3 million of share repurchases. Cash increased $5.6 million over the 24-week period.
Debt, liquidity, and capital allocation
- Long-term debt was $3.435 billion, including $684.8 million of commercial paper; short-term borrowings were $29.6 million. The company reported $714.4 million of variable-rate debt. Adjusted debt/EBITDAR was 2.4x, compared with 2.5x a year earlier.
- The $1.0 billion revolving credit facility expires in September 2016. Available capacity was $283.5 million after commercial paper and specified outstanding items; the filing separately notes $996.6 million of availability excluding commercial paper.
- Management said it expects fiscal 2012 capital expenditures to increase 20%–25% from fiscal 2011, primarily for new stores, existing-store improvements, and infrastructure. It opened 54 net new stores in the first 24 weeks.
- The board increased the cumulative buyback authorization to $11.9 billion on March 7, 2012. After the quarter, the company repurchased 26,240 shares for $10.0 million. Repurchases reduced diluted EPS by fewer shares: management estimated a $0.35 quarterly and $0.67 year-to-date EPS benefit versus the prior-year comparison.
- Management reported compliance with debt covenants and expected continued compliance. It expects to fund investment and repurchases primarily from internal cash flow and borrowing capacity, with possible new borrowings.
Changes, outlook, and risks
- Year-to-date net income rose 11.8%, while diluted EPS rose 24.1%; lower weighted-average share counts from repurchases contributed to EPS growth. Average borrowings increased, but lower borrowing rates partly offset the effect on interest expense.
- Management cited longer vehicle ownership and an aging vehicle fleet as supportive demand factors, but noted that higher gasoline prices may constrain discretionary spending. Miles driven had declined slightly through December 2011, the latest information cited. Weather affected product mix in the quarter.
- Management cautioned that results are seasonal and interim performance is not necessarily indicative of the fiscal year. It provided no specific earnings or sales guidance in the supplied filing text.
- Risks identified include economic conditions, competition, product demand, hiring and retention, inflation and supplier costs, energy prices, weather, financing access, construction delays, and changes in laws or regulations. Management said risk factors had not materially changed from the prior 10-K.
- In the Coalition for a Level Playing Field litigation, plaintiffs appealed dismissal; AutoZone says it believes the suit is without merit and is defending it. The company cannot estimate a loss or range of loss. A New Jersey groundwater remediation matter and employment-related lawsuits were also disclosed; management did not expect these matters to have a material financial effect.
- The company expects no material effect from recently issued accounting guidance. A 1 percentage-point increase in interest rates was estimated to reduce annual pretax earnings and cash flow by $7.1 million at reported variable-debt levels.
Important facts for investors to verify
- Whether same-store sales growth can continue despite weaker transaction counts, fuel-price pressure, and uncertainty in miles driven.
- Execution and returns from planned higher capital spending, new-store openings, and infrastructure investment.
- Debt maturities, commercial-paper refinancing capacity, and liquidity after ongoing repurchases and investment.
- Potential outcomes of the appealed antitrust case and the New Jersey remediation matter, for which loss estimates are unavailable or uncertain.
- The effect of repurchases on per-share growth relative to underlying operating growth, and the sustainability of margins amid higher self-insurance costs.