Business Context and Reporting Period
Company: AutoZone, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 22, 2008 (Twelve weeks)
Business Overview: AutoZone is the nation's leading retailer of automotive parts and accessories. As of November 22, 2008, the company operated 4,272 stores, including 150 in Mexico. The business is seasonal, with peak sales typically occurring in spring and summer.
Key Financial Metrics
| Metric | Twelve Weeks Ended Nov 22, 2008 | Twelve Weeks Ended Nov 17, 2007 |
|---|---|---|
| Net Sales | $1,478.3 million | $1,455.7 million |
| Gross Profit | $741.2 million | $726.4 million |
| Gross Margin | 50.1% | 49.9% |
| Operating Profit | $238.5 million | $237.4 million |
| Net Income | $131.4 million | $132.5 million |
| Diluted EPS | $2.23 | $2.02 |
| Operating Cash Flow | $140.8 million | $171.0 million |
| Total Debt | $2,268.2 million | $2,250.0 million |
| Cash and Equivalents | $85.8 million | $242.5 million (Prior Period End) |
Material Changes vs. Prior Period
- Sales Growth: Net sales increased 1.6% year-over-year. However, domestic same-store sales declined 1.5%, offset by growth in commercial sales (1.8%) and Mexico/ALLDATA operations (14.2%).
- Profitability: Net income decreased slightly by $1.1 million. Diluted earnings per share increased 10.1% primarily due to significant share repurchases reducing the share count.
- Expenses: Operating expenses as a percentage of sales rose to 34.0% from 33.6%, driven by higher occupancy and self-insurance costs. Interest expense increased to $31.2 million from $28.1 million due to higher average debt levels and borrowing rates.
- Liquidity: Cash and cash equivalents dropped significantly from $242.5 million to $85.8 million, a decrease of $156.7 million, largely due to financing activities.
Guidance, Outlook, and Risks
Management Commentary: Management noted resilience in a challenging macro environment. While new vehicle sales have declined (benefiting the aging fleet AutoZone serves), miles driven have declined for 12 consecutive months. Management is optimistic that declining gas prices will normalize miles driven trends. The company is focusing on selling essential parts and improving sales tools (Z-net).
Capital Allocation: The company continues an aggressive stock repurchase program. During the quarter, $272.1 million was spent to repurchase 2.23 million shares. The Board increased the cumulative repurchase authorization to $7.4 billion in December 2008.
Risks and Contingencies:
- Market Risk: A $2.7 million mark-to-market loss was recorded on fuel swap contracts. The fair value of debt is currently below its carrying value by $306 million due to interest rate fluctuations.
- Credit Ratings: AutoZone maintains investment-grade ratings (BBB/Baa2) with a stable outlook. A downgrade could increase interest expenses and limit access to commercial paper markets.
- Seasonality: The fourth quarter is historically the lowest sales period (December-February).
Investor Verification Checklist
- Share Count Impact: Verify the impact of the $272 million stock buyback on future EPS calculations.
- Inventory Levels: Review the $2.19 billion inventory balance and the $215.2 million LIFO reserve to assess exposure to price deflation or inflation.
- Debt Maturity: Confirm the schedule of debt maturities, noting $300 million in bank term loans due in December 2009 and various senior notes maturing between 2010 and 2018.
- Cash Burn: Monitor the $156.7 million reduction in cash reserves and the reliance on commercial paper ($18.9 million outstanding) to fund operations and buybacks.
- Same-Store Sales: Track the 1.5% decline in domestic same-store sales to determine if it is a temporary weather-related anomaly or a structural trend.