AutoZone, Inc. — Q2 FY2011 Form 10-Q
Business context and reporting period
AutoZone operates automotive parts and accessories stores, commercial sales, ALLDATA and e-commerce businesses. At February 12, 2011, it operated 4,674 stores: 4,425 in the U.S. and Puerto Rico and 249 in Mexico. The fiscal second quarter was the 12 weeks ended February 12, 2011; year-to-date figures cover 24 weeks. Results are unaudited interim figures, and the company cautions that seasonality and the differing fiscal-quarter lengths limit their predictive value.
Financial performance and position
| Metric | Q2 FY2011 | Q2 FY2010 | 24 weeks FY2011 | 24 weeks FY2010 |
|---|---|---|---|---|
| Net sales | $1.661 billion | $1.506 billion | $3.453 billion | $3.095 billion |
| Gross profit / margin | $845.6 million / 50.9% | $753.7 million / 50.0% | $1.753 billion / 50.8% | $1.554 billion / 50.2% |
| Operating profit | $271.7 million | $230.4 million | $577.9 million | $490.8 million |
| Net income | $148.1 million | $123.3 million | $320.1 million | $266.6 million |
| Diluted EPS | $3.34 | $2.46 | $7.11 | $5.28 |
- Q2 sales increased 10.3%; domestic same-store sales grew 7.1%. Year-to-date sales rose 11.5%, with domestic comparable-store sales up 8.4%. New stores contributed $44.3 million of Q2 and $93.5 million of year-to-date sales.
- Q2 SG&A was $573.9 million, or 34.6% of sales, versus 34.7% a year earlier. Year-to-date SG&A was $1.175 billion, or 34.0%, versus 34.3%.
- Q2 net interest expense was $39.6 million, up from $36.3 million; year-to-date it was $76.8 million, up from $72.7 million. The company attributed the increase mainly to higher average borrowings.
- Operating cash flow for the first 24 weeks was $441.1 million, compared with $348.9 million. Capital expenditures were $108.4 million; investing cash flow used $109.3 million. Financing cash flow used $322.8 million, including $694.1 million of share repurchases. Cash ended at $107.9 million.
- At February 12, current assets were $2.738 billion and current liabilities $3.225 billion. Long-term debt was $3.208 billion, including $458.3 million of commercial paper; additional short-term borrowings were $40.9 million. Stockholders’ deficit was $1.038 billion.
Changes versus the prior comparable period
Profit growth outpaced sales growth: diluted EPS increased 35.8% in Q2 and 34.7% year to date. Management attributed gross-margin improvement to higher merchandise margins, including greater Duralast penetration and lower acquisition costs, and lower shrink. Store-expense leverage from higher sales helped offset higher incentive compensation, hub-store investment and advertising. Buybacks also increased diluted EPS by an estimated $0.40 in Q2 and $0.77 year to date.
Operating cash flow improved, while repurchases rose substantially from $291.9 million in the prior-year 24 weeks. The company issued $500 million of 4.000% senior notes due 2020, repaid $199.3 million of maturing debt and used proceeds partly to reduce commercial paper. It repurchased 2.83 million shares during the 24-week period and retired 6.6 million previously repurchased shares.
Outlook, management commentary and risks
- Management expects FY2011 capital expenditures to increase 15%–20% versus FY2010, mainly for new stores, hub stores and existing-store and infrastructure improvements. It opened 47 net new stores in the first 24 weeks.
- Management said recession-related conditions and an aging vehicle fleet may have supported demand, while miles driven had remained relatively flat through December 2010. It could not predict how long these trends would continue or their future effect. The quarter’s $0.25-per-gallon rise in gasoline prices was not considered significant to results.
- Management expects to fund most investment, working-capital needs and repurchases with internally generated cash and borrowing capacity, with potential additional debt funding. Vendor financing supports working capital; management noted this could be constrained by vendors’ ability to factor receivables.
- The company reported $309.4 million of available revolving-credit capacity after commercial paper and certain letters of credit. A separate note states $796.0 million availability before considering commercial-paper borrowings. The facility expires July 2012; the company reported covenant compliance.
- Adjusted debt-to-EBITDAR, a company-defined non-GAAP measure, was 2.5x, unchanged from the prior-year comparison. Trailing-four-quarter ROIC was 29.3%, up from 25.2%.
- Risks cited include economic and credit-market conditions, competition, demand, hiring and retention, inflation, weather, supplier costs, energy prices, construction delays, financing availability and regulatory changes. The company identified no material changes to the risk factors in its latest 10-K.
- A proposed amended complaint remains pending in the Robinson-Patman Act lawsuit; earlier claims were dismissed, and AutoZone is opposing leave to amend. The company says it cannot estimate a loss or range. It considers potential New Jersey remediation costs and other employment-related litigation not material, but remediation costs remain unascertained.
- The interim statements received an independent accountant’s review, not an audit. Management reported disclosure controls were effective and no material change in internal controls.
Important facts for investors to verify
- Whether sales and margin growth persist, and how much EPS growth continues to depend on share repurchases.
- FY2011 capital spending, store openings and the cash required for inventory and vendor terms.
- Available revolver capacity and the refinancing plan for commercial paper and other debt, including the July 2012 facility expiry.
- Subsequent repurchases: 525,119 shares for $136.7 million after February 12, and remaining authorization of approximately $491.4 million as of quarter-end.
- Developments in the pending motion to amend the antitrust complaint and any changes to the currently unestimable potential exposure.