AutoZone, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Twelve weeks ended November 20, 2021; comparison is the twelve weeks ended November 21, 2020. AutoZone operates automotive-parts stores and commercial sales programs in the U.S., Mexico and Brazil, as well as ALLDATA and e-commerce businesses. Results are unaudited interim results and are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2022 | Prior period | Change |
|---|---|---|---|
| Net sales | $3,668.9 million | $3,154.3 million | +16.3% |
| Gross profit / margin | $1,925.2 million / 52.5% | $1,675.6 million / 53.1% | Margin down 0.6 percentage points |
| Operating profit / margin | $754.5 million / 20.6% | $615.2 million / 19.5% | Profit +22.6% |
| Net income | $555.2 million | $442.4 million | +25.5% |
| Diluted EPS | $25.69 | $18.61 | +38.1% |
| Operating cash flow | $777.9 million | $683.5 million | +$94.4 million |
Domestic same-store sales rose 13.6%; domestic commercial sales increased 29.4% to $899.9 million. New stores contributed $68.7 million in net sales. Commercial sales were approximately 25% of total sales. Diluted EPS benefited by $2.33 from share repurchases since the comparable prior-year period.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $961.1 million at November 20, down from $1,171.3 million at fiscal year-end. Cash flow from operations was partly offset by $900.0 million of treasury-stock purchases; cash declined by $210.2 million during the quarter.
- Debt before discounts and issuance costs totaled $5.3 billion, including $500 million of notes due April 2022 classified as current. The company said it intended to use operating cash to repay those notes. Net interest expense was $43.3 million, versus $46.2 million.
- The amended revolving credit facility increased capacity from $2.0 billion to $2.25 billion and matures November 2026. No borrowings were outstanding; reported availability was $2.2 billion. AutoZone was in covenant compliance.
- Adjusted debt to EBITDAR, a company-defined non-GAAP measure, was 2.0x, versus 2.3x a year earlier. Management said it expects the ratio to return to pre-pandemic levels, with debt levels rising as the target ratio is achieved.
- Stockholders’ deficit was $2.1 billion, compared with $1.8 billion at August 28, 2021, reflecting substantial repurchases. The company bought back $900.0 million of shares during the quarter. After the period, it repurchased a further $120.0 million through December 10 and the board authorized an additional $1.5 billion on December 14.
Changes, outlook and risks
- Gross margin declined primarily because of initiatives to accelerate commercial-business growth. Operating expenses fell to 31.9% of sales from 33.6%, as strong sales growth provided leverage.
- Management attributed higher operating cash flow to increased earnings and favorable accounts-payable changes associated with sustained inventory purchasing. Inventory rose to $4.8 billion from $4.6 billion at fiscal year-end; accounts payable was 129.4% of gross inventory, versus 114.1% a year earlier.
- Fiscal 2022 investment in the business is expected to increase versus fiscal 2021, mainly for store-base and supply-chain expansion, including new stores, mega hubs, distribution-center expansions and remodels. No numerical earnings or sales guidance is provided.
- Management reported continued strong sales during the COVID-19 pandemic but said future effects remain uncertain. Risks it identified include inflation, supply-chain and inventory disruption, labor availability and costs, fuel prices, weather, competition, credit conditions, cyber and IT risks, and future demand. Management said trends’ duration and future effects are difficult to predict.
- The company reported employee wage-and-hour and termination lawsuits, but management did not believe these matters would result in material liabilities. No material changes to previously disclosed risk factors were reported. The interim financial statements received an independent accountant’s review, not an audit.
Investor verification points
- Whether sales momentum, same-store growth and the unusually strong commercial-sales growth continue, and how commercial expansion affects gross margin.
- Inventory availability, vendor payment terms and the sustainability of accounts payable relative to inventory amid supply-chain and working-capital risks.
- Funding and repayment of the $500 million April 2022 notes, covenant headroom, and the company’s leverage trajectory and credit ratings.
- The scale and pace of share repurchases relative to operating cash flow, planned capital spending and liquidity needs.
- Actual fiscal 2022 store and supply-chain investment, given that management provided direction but no quantified outlook.