AutoZone, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended May 9, 2015 (12 weeks), with year-to-date results for the 36 weeks ended May 9, 2015. Comparisons are with the corresponding periods ended May 10, 2014. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context
AutoZone operated 5,512 locations across the United States, Puerto Rico, Mexico and Brazil, including 18 IMC branches, and also operated ALLDATA and e-commerce businesses. Its core business is selling and distributing automotive parts and accessories; it does not provide repair or installation services. The quarter is seasonally significant, as sales generally are highest February through September.
Financial performance
| Metric | 12 weeks ended May 9, 2015 | Prior-year quarter | 36 weeks ended May 9, 2015 | Prior-year period |
|---|---|---|---|---|
| Net sales | $2,493.0 million | $2,341.5 million | $6,896.9 million | $6,425.6 million |
| Gross profit | $1,302.8 million | $1,217.0 million | $3,599.5 million | $3,339.7 million |
| Gross margin | 52.3% | 52.0% | 52.2% | 52.0% |
| Operating profit | $513.9 million | $479.0 million | $1,283.8 million | $1,200.0 million |
| Net income | $309.1 million | $285.2 million | $759.1 million | $696.1 million |
| Diluted earnings per share | $9.57 | $8.46 | $23.33 | $20.34 |
- Quarterly sales rose 6.5%, including 2.3% domestic same-store sales growth, $47.9 million in sales from new stores and the contribution from acquired IMC. Year-to-date sales increased 7.3%.
- Quarterly diluted EPS increased 13.1%; year-to-date diluted EPS increased 14.7%. Management said stock repurchases contributed $0.36 to quarterly and $0.90 to year-to-date diluted EPS growth.
- Quarterly SG&A was $788.8 million, or 31.6% of sales, versus 31.5% a year earlier. Year-to-date SG&A was $2,315.7 million, or 33.6% of sales, versus 33.3%. Management attributed the increases principally to IMC; year-to-date also reflected higher incentive compensation.
- Net interest expense declined to $31.8 million for the quarter and $103.4 million year to date, mainly due to lower borrowing rates, partly offset by higher average borrowings.
Cash flow, balance sheet and capital allocation
- Year-to-date operating cash flow was $999.1 million, compared with $971.1 million. Capital expenditures were $292.7 million, up from $261.7 million, primarily reflecting new locations. Investing cash outflow was $384.7 million and financing cash outflow was $583.9 million.
- Cash was $153.3 million at May 9, 2015. Merchandise inventory was $3.468 billion. Current liabilities were $4.693 billion and current assets were $3.950 billion.
- Total debt was $4.533 billion, including $934.5 million of commercial paper. The company reported $1.711 billion available under its $1.750 billion revolving credit facilities and no borrowings under those facilities. It classified commercial paper and $300 million of notes due November 2015 as long-term based on its intent and ability to refinance.
- On April 29, 2015, AutoZone issued $400 million of 3.250% notes due 2025 and $250 million of 2.500% notes due 2021. Proceeds were used partly to repay commercial paper and for general corporate purposes. The company reported compliance with debt covenants and an adjusted debt-to-EBITDAR ratio of 2.5:1, unchanged from the prior-year comparison.
- AutoZone repurchased $840.9 million of shares during the 36-week period. The board increased the cumulative authorization to $15.65 billion; $778.3 million remained at period-end. After May 9, the company repurchased another 453,006 shares for $308.5 million.
- Year-to-date, AutoZone opened 104 net new locations, versus 78 in the prior-year period. Management expected fiscal 2015 investment to exceed fiscal 2014 levels, directed mainly to locations, existing-store improvements, supply-chain infrastructure, technology and IMC.
Changes, outlook and risks
- Management cited higher merchandise margins as the principal source of gross-margin improvement; IMC partly offset the increase. IMC was acquired in September 2014 for $75.7 million net of cash, and its purchase-price allocation remained preliminary.
- Management said earlier timing of tax refunds in fiscal 2015 likely weighed on third-quarter sales. U.S. gasoline prices were lower than a year earlier during the quarter; management believed lower prices supported customers’ disposable income but said future fuel-price effects were uncertain. Failure- and maintenance-related categories represented about 83% of quarterly sales, with failure-related products particularly strong.
- Management expected annual miles driven and the number of older vehicles to support the industry over time, but said it could not predict their effect on future results. No specific revenue, earnings or margin guidance was provided. Management cautioned that interim results are not necessarily indicative of the full fiscal year.
- Key disclosed risks include economic and credit-market conditions, competition, product demand, staffing, weather, fuel and supplier costs, construction delays, financing availability, and changes in law or regulation. Risk factors were reported as not materially changed from the prior Form 10-K.
- Legal matters include a New Jersey environmental remediation dispute, including a state demand of approximately $296,000 that AutoZone contests; a California hazardous-waste subpoena for which the company is cooperating; and employee wage-and-hour and termination lawsuits. Management did not expect the matters to be material, but said the ultimate outcome of the California inquiry could not be predicted and additional remediation costs could not yet be determined.
- Other notable items: foreign-currency translation reduced year-to-date comprehensive income by $72.1 million; $45.5 million of marketable securities secured certain insurance obligations. Management expected to reclassify $1.2 million of derivative-related losses into interest expense over the next 12 months.
Investor items to verify
- Whether same-store sales and margins remain resilient as tax-refund timing and fuel-price effects normalize.
- Whether IMC contributes as expected and how its preliminary purchase-price allocation and margin impact develop.
- Inventory growth, slower inventory turns and the accounts-payable-to-gross-inventory ratio, which declined to 110.9% from 114.1%.
- Debt refinancing and interest-rate exposure: $934.5 million of variable-rate debt was outstanding; a one-percentage-point rate increase was estimated to reduce annual pretax earnings and cash flow by $9.3 million.
- The pace and funding of store and infrastructure investment alongside substantial share repurchases, and the effect on returns on capital. Trailing-four-quarter ROIC declined to 31.1% from 32.4%.
- Developments in the environmental, hazardous-waste and employment matters, including any change to management’s assessment of potential financial exposure.
Review status: The interim financial statements were reviewed by Ernst & Young LLP, not audited; the firm reported no material modifications that should be made for conformity with U.S. GAAP. Management concluded disclosure controls were effective as of May 9, 2015.