AutoZone, Inc. — Form 10-Q Summary
Reporting period: 12 and 36 weeks ended May 4, 2019; filed June 7, 2019. AutoZone operated 6,287 stores across the U.S., Puerto Rico, Mexico and Brazil. Results are unaudited and the quarter’s performance is not necessarily indicative of the full fiscal year.
Financial performance
| Metric | 12 weeks ended May 4, 2019 | Change vs. prior year |
|---|---|---|
| Net sales | $2.783 billion | +4.6% |
| Gross profit / margin | $1.492 billion / 53.6% | Margin +0.1 percentage point |
| Operating profit | $547.5 million | +0.3% |
| Net income | $405.9 million | +10.7% |
| Diluted EPS | $15.99 | +19.2% |
| Net interest expense | $43.2 million | Up from $42.0 million |
Domestic same-store sales rose 3.9%; domestic commercial sales increased 14.9%. Sales growth also reflected new domestic stores, partly offset by the prior-year sale of businesses. SG&A was $944.5 million, or 33.9% of sales versus 33.0%; management attributed the deleverage mainly to higher store payroll and incentive compensation. The effective tax rate declined to 19.5% from 27.2%, primarily reflecting tax benefits from stock-option exercises.
Year to date: Net sales were $7.875 billion (+2.8%); gross margin was 53.8% versus 53.1%; operating profit was $1.435 billion versus $1.220 billion; net income was $1.052 billion (+12.2%); diluted EPS was $40.92 versus $33.75 (+21.2%). The prior-year period included $193.2 million of impairment charges and a net $111.9 million tax benefit related to Tax Reform, affecting comparability.
Cash flow, balance sheet and capital allocation
- For the 36 weeks, operating cash flow was $1.287 billion; capital expenditures were $313.8 million, implying approximately $972.8 million of operating cash flow less capital expenditures. The company opened 85 net new stores.
- Cash was $174.1 million. Current assets of $4.971 billion were below current liabilities of $5.317 billion, a $345.5 million working-capital deficit. Accounts payable equaled 108.5% of gross inventory; management cited favorable vendor terms and said vendor factoring capacity could limit its ability to maintain extended payment terms.
- Debt before discounts and issuance costs was $5.177 billion, including $976.8 million of commercial paper classified as long-term. Long-term debt carrying value was $5.152 billion. The company had $1.997 billion available under its $2.0 billion revolving credit facility and reported compliance with debt covenants.
- In April, AutoZone issued $750 million of senior notes due 2024 and 2029; proceeds partly refinanced commercial paper and repaid $250 million of notes due in April 2019. Adjusted debt to EBITDAR was 2.5x, unchanged from the comparable prior-year measure.
- Share repurchases totaled $1.313 billion for the 36 weeks. The board added $1.0 billion to authorization, leaving $1.169 billion available at May 4. Repurchases reduced weighted-average shares and increased quarterly diluted EPS by an estimated $0.98 versus the prior-year period.
Outlook, risks and notable items
- No specific sales or earnings guidance was provided. Management expected fiscal 2019 investment to exceed fiscal 2018, primarily for stores, supply-chain infrastructure, existing-store enhancements and technology; it anticipated using internally generated funds and borrowing capacity to fund investment, working capital and repurchases.
- Management noted seasonality, with sales generally strongest February through September and weakest in December and January. It cited miles driven and the aging vehicle fleet as relevant long-term market factors, while cautioning that macroeconomic trends and weather effects are difficult to predict.
- Key risks identified include demand, competition, fuel and energy prices, weather, financing and credit markets, inflation and supplier costs, staffing, construction delays, regulatory changes and cybersecurity.
- California hazardous-waste litigation and employee wage-and-hour and termination lawsuits remain outstanding. The company said it accrued probable and estimable amounts and did not expect these matters to have a material adverse effect. It also described a New Jersey environmental remediation dispute and demand; potential additional costs were not clearly quantified, but management did not expect a material impact.
- Adoption of the revenue-recognition standard resulted in a $6.8 million reduction to opening retained earnings; management said the overall impact was not material. The company expected the fiscal 2020 lease-accounting adoption to significantly increase lease-related assets and liabilities; income-statement effects were still under evaluation.
- The interim financial statements received an independent accountant’s review, not an audit. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Clarify the filing’s conflicting amounts for post-May 4 share repurchases: one passage reports $110.0 million, while another reports $10.0 million for 108,418 shares.
- Track whether commercial-sales growth and same-store sales continue, and whether increased store payroll and incentives affect operating margins.
- Review debt, commercial-paper refinancing capacity, vendor payment terms and liquidity needs alongside the planned higher investment and ongoing repurchases.
- Assess full-year comparability in light of prior-year impairment and Tax Reform items, and monitor the expected balance-sheet effect of lease accounting.