AutoZone, Inc. — Q1 Fiscal 2013 Form 10-Q
Reporting period: Twelve weeks ended November 17, 2012; comparisons are with the twelve weeks ended November 19, 2011, unless otherwise noted. AutoZone sells automotive parts and accessories through retail stores, commercial programs and online channels, and sells ALLDATA repair software. It operated 5,029 stores across the U.S., Puerto Rico, Mexico and Brazil, including its first Brazil store opened in the quarter. The business is seasonal, and management cautions that quarterly results are not necessarily indicative of the fiscal year.
Financial performance and position
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Net sales | $1.991 billion | $1.924 billion |
| Gross profit / gross margin | $1.032 billion / 51.8% | $983.6 million / 51.1% |
| Operating profit | $363.3 million | $340.9 million |
| Net income | $203.5 million | $191.1 million |
| Diluted EPS | $5.41 | $4.68 |
| Operating cash flow | $318.3 million | $342.3 million |
| Capital expenditures | $80.4 million | $61.9 million |
- Sales increased 3.5%; diluted EPS increased 15.7%. Domestic same-store sales grew 0.2%, while new stores contributed $44.0 million in sales. Auto parts sales increased 3.4%.
- Gross margin improved 0.7 percentage points, primarily from better merchandise margins due to lower acquisition costs and shrink. SG&A rose to 33.6% of sales from 33.4%, reflecting higher store payroll, partly offset by lower advertising expense.
- Net interest expense increased to $41.1 million from $39.1 million, mainly due to higher average borrowings ($3.741 billion versus $3.287 billion), partly offset by a lower weighted-average borrowing rate (4.5% versus 4.8%). The effective tax rate was 36.9%, compared with 36.7%.
- Cash and cash equivalents were $99.9 million at November 17, 2012. Merchandise inventory was $2.702 billion. Total debt carrying value was $3.803 billion, including $552.7 million of commercial paper; stockholders’ deficit was $1.591 billion.
- Operating cash flow was lower year over year, which management attributed primarily to vendor-receivable timing, higher commercial receivables, and inventory changes net of payables. Investing used $85.6 million and financing used $235.9 million. The company spent $317.3 million repurchasing shares.
Material changes and capital structure
- On November 13, 2012, AutoZone issued $300 million of 2.875% senior notes due 2023. Proceeds were used in part to repay commercial paper; the company also repaid $300 million of 5.875% notes that matured in October 2012.
- At November 17, the company reported $412.6 million of available capacity under its $1.0 billion revolving credit facility. Commercial paper and the 4.375% notes due June 2013 were classified as long-term based on management’s stated intent and ability to refinance. The company said it was in compliance with debt covenants.
- Adjusted debt to EBITDAR was 2.5x, versus 2.4x a year earlier. Debt fair value was estimated at $4.110 billion, $307.5 million above carrying value.
- The board raised the cumulative share-repurchase authorization to $12.65 billion. There was $788.4 million remaining at quarter-end; subsequent to quarter-end, AutoZone repurchased 153,489 shares for $57.7 million. Management said repurchases since the prior-year comparison period added $0.41 to current-quarter diluted EPS.
Outlook, risks and unusual items
- Management expects fiscal 2013 capital expenditures to increase 10%–15% over fiscal 2012, primarily for new-store development and improvements to stores and infrastructure. It expects a continued shift toward land purchases and ground leases, which generally require more initial investment. The quarter included 23 net new stores, compared with 19 a year earlier.
- Management cited challenging economic conditions, consumer cash flow, gasoline prices, weather and vehicle-maintenance demand as factors affecting sales. Mild winter conditions in the prior year reduced the comparison benefit for maintenance products; Hurricane Sandy disrupted some Northeast stores. Failure and maintenance categories together represented approximately 84% of sales.
- After quarter-end, AutoZone agreed to acquire assets and selected liabilities of AutoAnything, an online automotive-products retailer. The company expected to fund the acquisition with commercial paper and close in fiscal Q2 2013.
- In a New Jersey groundwater-contamination matter, the state may assert liability for off-site impacts; AutoZone intends to contest such claims. The company said potential additional costs could not yet be determined but were not currently expected to be material. It also disclosed employee wage-and-hour and termination lawsuits, which it did not expect to be material.
- Management identified risks including credit-market conditions, recessionary conditions, competition, product demand, staffing, consumer debt, inflation, weather, supplier costs, energy prices, construction delays, financing access and regulatory changes. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether AutoAnything closed as expected, its purchase terms and the resulting commercial-paper financing.
- Progress against the 10%–15% fiscal 2013 capital-expenditure outlook and the effect of store growth on cash needs.
- Whether same-store sales, merchandise-margin gains and payroll costs sustain or reverse their quarter-end trends.
- Commercial-paper refinancing capacity, upcoming debt maturities, covenant compliance and leverage.
- Developments in the New Jersey remediation matter and employee litigation, including any change in expected exposure.