AutoZone, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended February 15, 2014 (12 weeks); year to date covers 24 weeks. AutoZone sells automotive parts and accessories through stores, commercial programs and online channels, and sells ALLDATA repair software. It operated 5,242 stores across the United States, Puerto Rico, Mexico and Brazil at quarter-end. Results are unaudited interim figures; the independent accountant performed a review, not an audit.
Financial performance and liquidity
| Metric | 12 weeks ended Feb. 15, 2014 | Prior-year comparable | 24 weeks ended Feb. 15, 2014 | Prior-year comparable |
|---|---|---|---|---|
| Net sales | $1.990 billion | $1.855 billion | $4.084 billion | $3.846 billion |
| Gross profit / margin | $1.037 billion / 52.1% | $962.0 million / 51.9% | $2.123 billion / 52.0% | $1.994 billion / 51.8% |
| Operating profit | $337.3 million | $317.6 million | $721.1 million | $680.8 million |
| Net income | $192.8 million | $176.2 million | $410.9 million | $379.7 million |
| Diluted EPS | $5.63 | $4.78 | $11.92 | $10.19 |
- Quarterly sales rose 7.3%; domestic same-store sales increased 4.3%. Year-to-date sales rose 6.2%, with domestic same-store sales up 2.5%.
- Quarterly diluted EPS increased 17.8%; management attributed $0.43 of quarterly EPS growth to share repurchases. Year-to-date EPS rose 17.0%, including a $0.83 repurchase impact.
- Quarterly SG&A was 35.2% of sales versus 34.7%; year-to-date it was 34.3% versus 34.1%. Management cited advertising timing for the quarterly increase and store payroll and advertising for the year-to-date increase.
- Net cash from operations was $508.0 million year to date, compared with $510.8 million. Investing used $173.8 million, including $160.0 million of capital expenditures; financing used $336.7 million. Cash ended at $139.8 million.
- At February 15, total debt was $4.322 billion, including $871.7 million of commercial paper; long-term debt on the balance sheet was $4.163 billion. The company had $1.213 billion available under its $1.25 billion revolving facility, which expires in September 2017. Adjusted debt to EBITDAR was 2.5x, versus 2.6x a year earlier.
- Current assets were $3.538 billion and current liabilities were $4.399 billion. Stockholders’ deficit was $1.710 billion. The company repurchased $491.5 million of shares during the 24-week period.
Material changes and management commentary
- Quarterly gross margin improved 0.2 percentage point, reflecting higher merchandise margins and lower shrink, partly offset by AutoAnything’s inclusion. Year-to-date gross margin also improved 0.2 point, with lower acquisition costs and shrink cited.
- On January 14, 2014, AutoZone issued $400 million of 1.300% senior notes due 2017, using proceeds and commercial paper to repay $500 million of notes due January 2014. Debt increased year over year, while lower borrowing rates helped keep interest expense slightly lower.
- AutoZone opened 41 net new stores year to date, versus 64 in the comparable period. Management expects fiscal 2014 investment to exceed fiscal 2013, primarily for new stores, store improvements and infrastructure; store development is shifting toward ground leases and land purchases, which generally require more capital.
- Management noted colder U.S. weather increased store traffic, particularly in failure-related categories. It cited consumer economic pressures and high gasoline prices as factors affecting customers, but said the older vehicle fleet and miles-driven trends were supportive indicators. The filing provides no specific earnings or sales guidance.
- Management expects approximately $18.4 million in pension contributions during the remainder of fiscal 2014, subject to interest rates and plan returns. It reported compliance with debt covenants and expected to remain compliant.
Risks, contingencies and unusual items
- Management identified risks including economic conditions, competition, product demand, weather, energy and supplier costs, financing availability, labor, and regulatory changes. Sales are seasonal, and results to date are not necessarily indicative of full-year results.
- A New Jersey environmental matter involves possible off-site groundwater and vapor impacts. The state asserted liability; AutoZone contests the assertion and says potential costs cannot currently be determined, but it does not expect the matter to be material. Other employee lawsuits include class-action allegations; management likewise does not expect material liabilities.
- Variable-rate debt was $871.7 million. The company estimated that a one-percentage-point rate increase would adversely affect annual pretax earnings and cash flows by $8.7 million at the stated borrowing level.
- Share repurchases were substantial: $491.5 million year to date, with $726.9 million remaining under authorization at quarter-end. After quarter-end, the company repurchased another 252,845 shares for $136.0 million.
Important facts for investors to verify
- Whether same-store sales growth and gross-margin gains persist, and how weather, advertising costs and AutoAnything affect margins.
- Debt, commercial-paper refinancing capacity, interest-rate exposure and continued covenant compliance.
- Capital spending and store-opening plans relative to operating cash flow, alongside ongoing share repurchases.
- Developments in the New Jersey remediation matter and employee litigation, including any change in management’s assessment of potential costs.
- Whether consumer conditions, gasoline prices and vehicle-age or miles-driven trends support demand in subsequent quarters.