AutoZone, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first 24 weeks of fiscal 2013, ended February 9, 2013. Comparable periods ended February 11, 2012. The company operates automotive-parts retail and distribution stores and related software and e-commerce businesses. Interim results are unaudited and seasonality means they are not necessarily indicative of full-year performance.
Key financial results
| Metric | 12 weeks ended Feb. 9, 2013 | Change vs. prior year | 24 weeks ended Feb. 9, 2013 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $1.855 billion | +2.8% | $3.846 billion | +3.2% |
| Gross profit / margin | $962.0 million / 51.9% | Margin +0.6 percentage points | $1.994 billion / 51.8% | Margin +0.6 percentage points |
| Operating profit | $317.6 million | +5.6% | $680.8 million | +6.1% |
| Net income | $176.2 million | +5.6% | $379.7 million | +6.0% |
| Diluted EPS | $4.78 | +15.1% | $10.19 | +15.5% |
| Operating cash flow | Not provided for quarter alone | — | $510.8 million | Prior year: $461.2 million |
Quarter sales growth reflected new-store openings and more commercial programs, partly offset by a 1.8% decline in domestic same-store sales. Year-to-date domestic same-store sales declined 0.7%. Management attributed gross-margin improvement mainly to lower acquisition costs; year-to-date also benefited from lower shrink. SG&A was 34.7% of quarterly sales, unchanged year over year, and 34.1% year to date versus 34.0%.
Cash, debt and liquidity
- Cash and cash equivalents were $115.5 million at February 9, 2013. Operating cash flow of $510.8 million was offset by $289.8 million of investing outflows and $209.1 million of financing outflows; cash increased $12.5 million from fiscal year-end.
- Capital expenditures were $169.6 million year to date, versus $132.4 million. The company opened 64 net new stores, compared with 54 in the prior-year period. AutoAnything acquisition cash payment was $115 million.
- Total debt was $3.998 billion, including $747.8 million of commercial paper. Long-term debt was $3.513 billion; short-term borrowings were $484.5 million. Interest expense increased year over year as average borrowings rose, partly offset by lower borrowing rates.
- The company had $215.5 million of available capacity under its $1.0 billion revolving credit facility after commercial paper and other usage, and reported compliance with debt covenants. Adjusted debt to EBITDAR was 2.6x, versus 2.4x a year earlier.
- Accounts payable equaled 110.0% of gross inventory. Stockholders’ deficit was $1.550 billion, reflecting the company’s substantial share repurchases and treasury-stock accounting.
Material developments, outlook and risks
- AutoZone acquired online retailer AutoAnything effective December 19, 2012, for up to $150 million: $115 million initial cash, a $5 million working-capital holdback, and contingent payments up to $30 million. The acquisition added $83.3 million of goodwill and $58.8 million of intangible assets. Management expects it to strengthen online offerings in automotive accessories and performance products.
- The company repurchased 1.37 million shares for $502.3 million in the first 24 weeks. Remaining authorization at February 9 was $603.4 million. Repurchases increased diluted EPS by an estimated $0.75 year to date and $0.39 for the quarter.
- Management forecast fiscal 2013 capital expenditures to increase 10%–15% versus fiscal 2012, with investment focused on store development, existing-store and infrastructure improvements, and AutoAnything. It anticipated relying primarily on internally generated funds and borrowing capacity, with possible additional borrowings.
- Management cited delayed tax refunds and the return of payroll taxes to historic levels as headwinds; domestic same-store sales fell 8% in the final two weeks of the quarter. It expected more normalized sales volumes in the third quarter, but noted that macroeconomic conditions, gas prices, weather, consumer finances and vehicle-use trends create uncertainty.
- New Jersey regulators asserted potential company liability for off-site groundwater and vapor impacts near a store site. AutoZone intends to contest the assertion; costs cannot currently be determined, but management does not expect a material effect. The filing also describes employee wage-and-hour and termination lawsuits, which management does not expect to be material.
- Other identified risks include competition, demand, labor, inflation and supplier costs, energy prices, construction delays, financing access, and regulatory changes. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether domestic same-store sales recover after the unusual final-two-week decline and the delayed tax-refund impact.
- Whether forecast capital spending and store growth generate returns while debt and adjusted leverage remain elevated.
- AutoAnything’s operating performance, contingent-payment exposure, and contribution to online sales and earnings.
- Repurchase pace and its effect on leverage, liquidity and per-share results.
- Developments in the New Jersey remediation matter, including potential off-site obligations and state reimbursement eligibility.
The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management stated disclosure controls were effective as of February 9, 2013.