AZO

Business Context and Reporting Period

Company: AutoZone, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 30, 2003 (52 weeks)
Business Overview: AutoZone is the nation's leading specialty retailer of automotive parts and accessories, primarily serving do-it-yourself (DIY) customers. As of the period end, the company operated 3,219 domestic stores in the U.S. and 49 stores in Mexico. The company also operates a commercial sales program (AZ Commercial) and sells diagnostic software (ALLDATA).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2.5% year-over-year. Excluding the impact of the 53rd week in fiscal 2002, sales grew 4.6%. Comparable store sales increased 3%, driven by a 27% increase in commercial sales in same stores, while retail same-store sales were flat.
• Margin Expansion: Gross margin improved by 150 basis points to 46.1%, attributed to new merchandise, reduced warranty expenses, and strategic pricing. Operating expenses as a percentage of sales declined by 80 basis points to 29.3%.
• Profitability: Operating profit increased 19% to $917.8 million. Net income rose 20.9% to $517.6 million, while diluted EPS grew 33.5% to $5.34, aided by significant share repurchases.
• Debt Levels: Total debt increased by approximately $352 million to $1.55 billion, primarily to fund store development and stock repurchases. The company issued $300 million in 5.875% Senior Notes (2012 maturity) and $200 million in 4.375% Senior Notes (2013 maturity) during the year.
• Store Count: Net new domestic stores opened totaled 151, bringing the total domestic count to 3,219.

Guidance, Outlook, and Risks

• Outlook: Management expects to open approximately 195 new stores during fiscal 2004. The company anticipates relying on internally generated funds for the majority of capital expenditures and working capital, with the balance funded through borrowings.
• Accounting Changes: Fiscal 2003 results were impacted by the adoption of EITF Issue No. 02-16 regarding vendor funding. This resulted in a $10 million pre-tax negative impact and a reclassification that increased operating expenses by $53 million while decreasing cost of goods sold by $43 million.
• Legal Proceedings: The company is a defendant in a significant lawsuit (Coalition for a Level Playing Field, L.L.C., et al. v. AutoZone, Inc.) alleging violations of the Robinson-Patman Act. While AutoZone won a jury verdict on 22 plaintiffs' claims in January 2003, the plaintiffs appealed, and approximately 200 other plaintiffs sought to reinstate their claims. The company intends to vigorously defend against these actions.
• Risk Factors: Key risks include intense competition, dependence on qualified employees, demand sensitivity to economic conditions and vehicle age, and potential vendor consolidation leading to higher merchandise costs.

Investor Verification Checklist

• Vendor Funding Accounting: Verify the impact of EITF 02-16 on gross margin and operating expense classifications to ensure accurate year-over-year comparisons.
• Legal Exposure: Monitor the status of the Robinson-Patman Act litigation, specifically the appeal of the 22 plaintiffs and the reinstatement of claims by the remaining 200 plaintiffs.
• Debt Maturities: Review the debt schedule, noting $420.7 million in maturities due in fiscal 2004, which are currently classified as long-term based on refinancing intent.
• Share Repurchases: Confirm the remaining authorization under the $3.3 billion stock repurchase program, of which $2.8 billion had been utilized as of August 30, 2003.
• Comparable Store Sales: Analyze the divergence between flat retail same-store sales and the 27% growth in commercial same-store sales to understand the shifting revenue mix.