AutoZone, Inc. — Q1 FY2011 Form 10-Q
Reporting period: Twelve weeks ended November 20, 2010; comparative period ended November 21, 2009. AutoZone operates automotive parts stores in the U.S. and Mexico, alongside ALLDATA and e-commerce activities. Results are unaudited interim figures and may not indicate full-year performance; the business is seasonal.
Financial performance
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,791.7 million | $1,589.2 million | +12.7% |
| Gross profit / margin | $907.7 million / 50.7% | $799.9 million / 50.3% | Margin +0.4 percentage points |
| Operating profit / margin | $306.1 million / 17.1% | $260.4 million / 16.4% | Margin +0.7 points |
| Net income / net margin | $172.1 million / 9.6% | $143.3 million / 9.0% | Net income +20.1% |
| Diluted EPS | $3.77 | $2.82 | +33.7% |
| Operating cash flow | $357.4 million | $230.9 million | +$126.5 million |
| Capital expenditures | $45.8 million | $53.4 million | -$7.6 million |
Domestic same-store sales rose 9.5%, driven by higher transaction value and transaction count; sales grew in both retail and commercial channels. Gross-margin improvement reflected greater Duralast product penetration and lower product acquisition costs. SG&A increased to $601.6 million, but declined as a share of sales to 33.6% from 33.9%, reflecting store-expense leverage partly offset by higher incentive compensation, legal expenses, and hub-store investment. Net interest expense was $37.3 million versus $36.3 million; the effective tax rate was 36.0% versus 36.1%.
Cash, liquidity, and capital
- Cash and equivalents were $98.0 million at November 20, versus $98.3 million at August 28, 2010. Cash from operations exceeded capital expenditures by approximately $311.5 million.
- Current assets were $2.661 billion and current liabilities $3.245 billion, implying a current ratio of about 0.82 and negative working capital of approximately $584 million. The accounts-payable-to-inventory ratio was 107%, compared with 97% a year earlier; management cited supplier financing and payment timing as cash-flow factors.
- Debt was approximately $2.879 billion, including $2.846 billion classified as long-term and $33.5 million in short-term borrowings. The company issued $500 million of 4.00% notes due 2020, repaid $199.3 million of notes that matured, and reduced commercial paper. Adjusted debt/EBITDAR was 2.3x, down from 2.5x a year earlier.
- Management reported $669.6 million of available capacity under its $800 million revolving credit facility at November 20, 2010; the facility expires in July 2012. It reported compliance with debt covenants. Commercial paper borrowings were $95.7 million, classified as long-term based on intent and ability to refinance.
- Share repurchases totaled $299.7 million for 1.295 million shares. The company had $385.8 million remaining under its authorization at quarter-end; the board subsequently increased the authorization by $500 million, and a further $84.8 million of repurchases occurred after quarter-end.
- Stockholders’ deficit was $817.2 million at November 20, compared with $738.8 million at August 28. The filing attributes substantial capital return activity to its repurchase program; issued and outstanding shares declined during the quarter.
Outlook, commentary, and risks
- Management expects FY2011 capital expenditures to increase 15%–20% versus FY2010, with investment focused on new stores, hub stores, existing-store enhancements, and infrastructure. It expects internally generated funds and borrowing capacity to fund most investment, working capital, and repurchases.
- The company opened 18 net new stores during the quarter, compared with 41 in the prior-year quarter. It operated 4,645 stores at November 20.
- Management said recession-related conditions and an aging vehicle fleet may have supported demand, while miles driven remained relatively flat through September. It could not predict whether these trends would continue or their future effect. Failure-related categories were the strongest-performing product categories in the quarter.
- Management cautioned that results are seasonal, with sales generally lowest in December and January, and that the twelve-week quarter is not necessarily indicative of FY2011 results. No full-year revenue or earnings guidance is provided in the filing text.
- Risks identified include credit-market conditions, recession, competition, product demand, labor availability, consumer debt, inflation, weather, supplier costs, energy prices, construction delays, financing access, and changes in laws or regulations. Management reported no material change in previously disclosed risk factors.
- A Robinson-Patman Act lawsuit was dismissed in September 2010, but plaintiffs sought leave to amend on behalf of four plaintiffs. AutoZone considers the case without merit but cannot estimate a loss or range of loss. Other employment-related lawsuits were not expected by management to produce material aggregate liabilities.
- Unusual financing item: interest-rate swaps associated with the 2020 notes expired in November; a $7.4 million after-tax loss was deferred in accumulated other comprehensive loss and will be amortized to interest expense over the debt’s life.
Most important facts to verify
- Whether sales and same-store growth, including the 9.5% domestic comparable-store increase, persisted beyond this seasonal quarter.
- The sustainability and composition of operating cash flow, particularly reliance on vendor payment terms and timing of income-tax payments.
- Planned capital-spending growth, actual store-opening pace, and resulting liquidity and leverage.
- Debt maturities, revolving-credit availability, and the effect of interest-rate changes; management estimated a one-percentage-point rate increase would raise annual pretax expense and cash outflow by $1.3 million at quarter-end variable-debt levels.
- Developments in the amended litigation and any change in the company’s inability to estimate potential loss.
The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective as of November 20, 2010.