Business Context and Reporting Period
Company: AutoZone, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Twelve and thirty-six weeks ended May 10, 2003.
Business Overview: AutoZone operates 3,152 domestic stores and 43 stores in Mexico as of May 10, 2003. The company is a leading retailer of automotive parts and accessories.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended May 10, 2003 |
36 Weeks Ended May 10, 2003 |
36 Weeks Ended May 4, 2002 |
|---|---|---|---|
| Net Sales | $1,288,445 | $3,627,776 | $3,482,173 |
| Gross Profit | $598,823 | $1,644,212 | $1,533,020 |
| Gross Margin % | 46.5% | 45.3% | 44.0% |
| Operating Profit | $221,883 | $557,707 | $459,086 |
| Operating Margin % | 17.2% | 15.4% | 13.2% |
| Net Income | $125,977 | $310,163 | $250,162 |
| Diluted EPS | $1.30 | $3.12 | $2.29 |
| Cash from Operations (36 wks) | $277,943 | ||
| Capital Expenditures (36 wks) | $(98,800) | ||
| Long-Term Debt | $1,419,967 (as of May 10, 2003) | ||
| Cash & Equivalents | $6,638 (as of May 10, 2003) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.2% for the quarter and 4.2% for the year-to-date period compared to the prior year. Comparable store sales increased 2.8% (quarter) and 3.2% (year-to-date), driven primarily by higher average transaction dollars rather than increased customer count.
- Margin Expansion: Gross margin improved to 46.5% (quarter) and 45.3% (year-to-date) from 44.3% and 44.0% respectively. Approximately 1.0 percentage point (quarter) and 0.4 percentage points (year-to-date) of this improvement is attributed to the adoption of EITF 02-16, which reclassified vendor cash consideration as a reduction of cost of sales.
- Operating Expenses: Operating expenses increased in absolute dollars but decreased as a percentage of sales due to leverage in staffing and IT spending. A $4.7 million gain was recognized from the settlement of the TruckPro business note receivable.
- Debt Structure: Long-term debt increased to $1.42 billion from $1.19 billion. This reflects the issuance of $300 million in 5.875% Senior Notes in October 2002 and increased commercial paper borrowings, partially offset by the prepayment of a $115 million term loan.
- Cash Flow: Operating cash flow decreased to $277.9 million (year-to-date) from $388.9 million in the prior year, primarily due to a strategic increase in inventory levels to improve in-stock positions and brand coverage.
Guidance, Outlook, and Risks
- Store Expansion: Management expects to open approximately 160 new domestic stores and close nine domestic stores during the fiscal year ending August 30, 2003.
- Capital Allocation: The company continues an aggressive share repurchase program. As of May 10, 2003, $2.8 billion remained authorized. During the fiscal year-to-date, $589.9 million of stock was repurchased, including settlements of equity forward contracts.
- Accounting Changes: The company adopted EITF 02-16, resulting in a $2.6 million pretax charge ($0.02 per share) due to the reclassification of vendor funds. The company is also evaluating the impact of FIN 46 regarding its $30 million synthetic lease facility, expected to be effective in fiscal 2004.
- Market Risks: The company is exposed to interest rate fluctuations on variable-rate debt (approx. $625 million outstanding) and fuel price volatility. A 1% increase in interest rates would impact pretax earnings by approximately $6.0 million annually. Credit ratings are currently BBB+ (S&P) and Baa2 (Moody's) with stable/positive outlooks.
- Off-Balance Sheet Items: Includes $29.9 million in synthetic lease obligations and equity forward contracts for approximately 4.0 million shares (subsequently settled).
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the intentional inventory build-up ($122 million increase in inventory cash outflow) and its impact on future working capital needs.
- Debt Refinancing: Confirm the status of the $265 million commercial paper and $150 million notes due in late 2003, and the successful renewal of the $300 million credit facility expiring May 2003.
- Share Repurchases: Monitor the execution of the remaining $2.8 billion repurchase authorization and the settlement of equity forward contracts.
- Comparable Store Sales: Assess whether the growth in average transaction dollars can be sustained without a corresponding increase in customer traffic.
- Accounting Adjustments: Review the long-term impact of EITF 02-16 on reported margins and the potential balance sheet impact of FIN 46 on synthetic leases in the next fiscal year.