AutoZone, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Twelve and thirty-six weeks ended May 7, 2011; comparisons are to the periods ended May 8, 2010. The interim statements are unaudited and were reviewed by the independent accountant, not audited. AutoZone operates automotive-parts retail and distribution businesses, with 4,728 stores in the U.S., Puerto Rico and Mexico at quarter-end.
Financial performance
| Metric | 12 weeks | 36 weeks |
|---|---|---|
| Net sales | $1.978 billion, up 8.6% | $5.431 billion, up 10.4% |
| Gross profit / margin | $1.014 billion / 51.2%, versus 50.7% | $2.767 billion / 50.9%, versus 50.4% |
| Operating profit | $392.9 million, versus $355.9 million | $970.8 million, versus $846.7 million |
| Net income | $227.4 million, versus $202.7 million | $547.5 million, versus $469.4 million |
| Diluted EPS | $5.29, up 28.5% | $12.35, up 31.8% |
- Quarterly domestic same-store sales increased 5.3%; year-to-date domestic comparable-store sales rose 7.2%. Growth reflected higher transaction value and, to a lesser extent, transaction count, plus sales from new stores.
- Gross-margin improvement reflected lower shrink and higher merchandise margins, including increased Duralast product penetration. Quarterly SG&A was 31.4% of sales versus 31.1%, reflecting hub-store investment and commercial delivery fuel costs; year-to-date SG&A remained 33.1% of sales.
- Net interest expense increased to $39.9 million for the quarter and $116.7 million year to date, mainly due to higher average borrowings. The effective tax rate was 35.6% for the quarter and 35.9% year to date.
Cash flow, balance sheet and funding
- For the 36 weeks, operating cash flow was $896.9 million, up from $741.0 million. Investing cash outflow was $200.9 million, including $200.6 million of capital expenditures. Financing cash outflow was $694.7 million; cash ended at $100.4 million.
- Capital expenditures were higher than the prior-year period ($200.6 million versus $180.1 million); AutoZone opened 101 net new stores versus 104. Working capital included a $174.1 million inventory cash outflow and a $277.2 million increase in accounts payable and accrued expenses.
- At May 7, cash was $100.4 million, inventory $2.492 billion, current liabilities $3.462 billion, and stockholders’ deficit $1.120 billion. The deficit includes the effects of substantial share repurchases and retirement of treasury shares.
- Long-term debt was $3.171 billion, including $421.1 million of commercial paper classified as long-term because the company said it had the ability and intent to refinance it. Separate short-term peso borrowings were $49.7 million. Debt increased from $2.882 billion at August 28, 2010.
- The $800 million revolving facility expires July 2012. MD&A reports $346.6 million available at May 7 after commercial paper and other reductions; the financing note separately describes $796.0 million availability before commercial-paper borrowings. The company reported compliance with debt covenants and an adjusted debt-to-EBITDAR ratio of 2.4:1, unchanged year over year.
Changes, outlook and risks
- Management attributed demand support to consumers keeping older vehicles longer and repairing them, while cautioning that these economic trends may not continue. Higher gasoline prices—$3.97 per gallon at quarter-end versus $2.91 a year earlier—were believed to constrain discretionary spending; maintenance and discretionary categories were also affected by weather in some markets.
- Management expected FY2011 capital expenditures to increase 10%–15% from FY2010, primarily for new stores, hub stores, existing-store improvements and infrastructure. It anticipated relying mainly on internally generated cash and available borrowing capacity, with possible additional debt funding. No specific earnings or sales guidance was provided.
- Buybacks were a significant use of capital: $1.033 billion and 4.1 million shares repurchased in the 36-week period. The board increased authorization by $500 million on June 14, 2011, to $10.4 billion; subsequent to quarter-end, 138,500 shares were repurchased for $40.0 million. Management attributed $0.66 of quarterly diluted EPS and $1.18 of year-to-date diluted EPS growth to repurchases since the respective prior-year periods.
- The company identified risks including fuel and energy prices, recession and consumer demand, competition, weather, supplier costs, financing access and store construction delays. It said risk factors had not materially changed from its FY2010 Form 10-K. It also noted that sales are seasonal and quarterly results are not necessarily indicative of the fiscal year.
- In the Robinson-Patman Act litigation, the court dismissed claims in 2010, but a plaintiffs’ motion to amend remained pending. AutoZone said it believed the suit lacked merit; it could not estimate a loss or range of loss. Environmental remediation at a New Jersey site and other employment-related proceedings were not believed by the company to create material liabilities.
Investor verification points
- Assess how much sales and EPS growth is attributable to comparable-store performance, new stores, margins and share-count reduction.
- Verify debt and liquidity presentation, including commercial paper classification, facility availability, refinancing capacity and the scale of buybacks relative to cash generation.
- Track capital-spending growth, inventory and vendor-payment financing, and the sustainability of the accounts-payable-to-inventory ratio.
- Monitor gasoline prices, consumer discretionary demand, weather, and the company’s seasonal sales pattern.
- Follow the pending motion in the antitrust litigation and any subsequent change in the company’s ability to estimate potential exposure.