AutoZone, Inc. — Fiscal 2014 Third-Quarter Form 10-Q
Reporting period: Twelve weeks ended May 10, 2014; year-to-date (YTD) covers 36 weeks. Comparatives are the twelve and 36 weeks ended May 4, 2013. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context
AutoZone sells automotive parts and accessories through stores and online channels, and provides repair-information software through ALLDATA. It reported 5,279 stores across the United States, Puerto Rico, Mexico and Brazil. The company does not provide vehicle repair or installation services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Net sales | $2.342B | $2.206B | $6.426B | $6.052B |
| Gross profit | $1.217B | $1.143B | $3.340B | $3.137B |
| Gross margin | 52.0% | 51.8% | 52.0% | 51.8% |
| Operating profit | $479.0M | $456.0M | $1.200B | $1.137B |
| Net income | $285.2M | $265.6M | $696.1M | $645.3M |
| Diluted EPS | $8.46 | $7.27 | $20.34 | $17.44 |
| Net interest expense | $36.2M | $42.1M | $118.1M | $124.5M |
Q3 sales rose 6.2%, including 4.0% domestic same-store sales growth; management attributed the remainder primarily to new stores and increased commercial programs. YTD sales also rose 6.2%, with domestic same-store sales up 3.1%. Gross margin improved 0.2 percentage points in both periods. Q3 SG&A was 31.5% of sales versus 31.1%; YTD it was 33.3% versus 33.0%.
Q3 net income increased 7.4% and diluted EPS increased 16.4%; YTD net income increased 7.9% and diluted EPS increased 16.6%. Management attributed $0.62 of Q3 diluted EPS and $1.15 of YTD diluted EPS growth to share repurchases. Lower borrowing rates reduced interest expense despite higher average borrowings.
Cash flow, balance sheet and capital allocation
- YTD operating cash flow was $971.1M, compared with $895.9M. Capital expenditures were $261.7M, versus $258.9M; operating cash flow less capital expenditures was approximately $709.4M.
- YTD investing cash outflow was $275.0M, versus $374.1M, when the prior-year period included $116.1M for the AutoAnything acquisition. The company opened 78 net new stores YTD, compared with 103.
- YTD financing cash outflow was $694.0M. The company repurchased $911.5M of stock and issued $400M of debt, while repaying $500M of notes due January 2014. Cash at May 10 was $145.3M.
- Total debt was $4.378B, including $928.4M of commercial paper; long-term debt on the balance sheet was $4.163B. The company had $1.213B available under its $1.25B revolving credit facility, which expires in September 2017. It reported compliance with debt covenants and an adjusted debt-to-EBITDAR ratio of 2.5:1.
- Current assets were $3.588B versus current liabilities of $4.604B. Stockholders’ deficit was $1.808B. The company reported accounts payable equal to 114.1% of gross inventory, versus 111.4% a year earlier.
- At May 10, $306.9M remained in the then-current repurchase authorization. On June 17, the board increased authorization by $750M; after subsequent repurchases, $1.013B remained under the expanded authorization.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance was provided. Management expected fiscal 2014 investment to increase versus fiscal 2013, principally for new stores, store improvements and infrastructure; its store mix was shifting toward higher-initial-investment ground leases and land purchases.
- Management said the business is seasonal, with generally higher sales February through September, and cautioned that the 36-week results do not necessarily indicate full-year results. Fiscal 2014’s fourth quarter has 16 weeks, versus 17 weeks in fiscal 2013.
- Management cited challenging consumer finances, weather, fuel prices and uncertainty in vehicle miles driven as factors that could affect demand. Maintenance-category sales increased after the harsh winter, which management believed reflected deferred maintenance. It also cited competition, labor, supplier costs, financing availability and regulatory changes among forward-looking risks.
- Q3 gross-margin improvement reflected higher merchandise margins and lower shrink, partly offset by supply-chain costs (25 basis points). Higher store payroll and the absence of a prior-year asset-disposal gain contributed to SG&A growth as a share of sales.
- Variable-rate debt was $928.4M. The company estimated that a 1 percentage-point rate increase would raise annual pretax interest expense and cash outflow by $9.3M. A 1-point rate increase would reduce the fair value of fixed-rate debt by an estimated $154.2M.
- New Jersey groundwater and potential off-site vapor-intrusion remediation remains a contingency; the company disputed the state’s liability assertions and said potential costs could not yet be determined, but were not expected to be material. The filing also describes employment-related lawsuits, not expected by management to be material.
- The company recorded $30.2M of intangible assets during the 36-week period, including ALLDATA customer-relationship and technology rights. It expected the new revenue-recognition standard, effective for it in fiscal 2018, to have no material financial-statement impact.
Most important facts to verify
- Whether same-store sales, store expansion and gross-margin improvement continue, and how higher SG&A affects operating margins.
- Debt, commercial-paper reliance, refinancing capacity and the effect of interest-rate changes on cash flow.
- Cash returned through repurchases relative to operating cash generation, capital spending and the company’s stockholders’ deficit.
- Inventory growth, supplier payment terms and accounts-payable-to-inventory levels.
- Developments in the New Jersey remediation matter and other litigation, including any change in expected costs or materiality.