AUTOZONE INC quarterly report, Q1 FY2010

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AutoZone, Inc. — Q1 FY2010 Form 10-Q

Reporting period: Twelve weeks ended November 21, 2009; comparison is the twelve weeks ended November 22, 2008. AutoZone operates automotive parts and accessories stores, commercial sales programs, ALLDATA, and e-commerce. It reported 4,458 stores in the U.S. and Mexico. Results for this quarter are not necessarily indicative of the full fiscal year; sales are generally seasonal.

Financial performance

  • Net sales: $1.589 billion, up 7.5% from $1.478 billion. Management attributed growth principally to 5.6% domestic same-store sales growth and $85.6 million in sales from new stores.
  • Gross profit and margin: $799.9 million and 50.3%, versus $741.2 million and 50.1%. Management cited lower fuel charges and improved distribution efficiencies.
  • Operating expenses and profit: SG&A was $539.5 million, or 33.9% of sales, versus $502.7 million, or 34.0%. Operating profit rose to $260.4 million from $238.5 million.
  • Net income and EPS: Net income was $143.3 million, up from $131.4 million. Diluted EPS was $2.82 versus $2.23, up 26.4%; management said share repurchases contributed $0.37 per diluted share to current-quarter EPS.
  • Interest and taxes: Net interest expense increased to $36.3 million from $31.2 million, primarily due to higher average borrowings; the effective tax rate was 36.1% versus 36.6%.
  • Cash flow: Operating cash flow was $230.9 million versus $140.8 million. Investing activities used $52.7 million, including $53.4 million in capital expenditures. Financing activities used $191.9 million, including $204.4 million for share repurchases. Cash declined $13.1 million during the quarter to $79.6 million.

Balance sheet, debt, and liquidity

  • At November 21, 2009, reported debt was $2.740 billion, compared with $2.727 billion at August 29, 2009; cash was $79.6 million. Stockholders’ deficit was $484.0 million.
  • Commercial paper outstanding was $290.2 million. The company also had $199.3 million of 4.75% senior notes due November 2010. Both were classified as long-term because the company said it had the ability and intent to refinance them on a long-term basis.
  • AutoZone reported $359.6 million of available capacity under its $800 million revolving credit facility, which expires in July 2012. It said it was in compliance with debt covenants.
  • Operating cash flow benefited from vendor financing of inventory purchases; accounts payable equaled 97% of inventory, versus 92% a year earlier. Management cautioned that the ability to continue this practice may depend on vendors’ capacity to factor receivables.

Changes, outlook, and risks

  • Management said both retail and commercial sales growth increased. It observed stronger performance in maintenance and failure-related categories and weakness in discretionary categories, which it expected to continue. It cited challenging economic conditions, improving miles driven, and an aging vehicle fleet as relevant demand factors.
  • Management expected fiscal 2010 investment generally in line with historical rates, primarily for new stores and improvements to existing stores and systems. It anticipated relying mainly on internally generated funds and borrowing capacity, with possible new borrowing to support investment, working capital, or repurchases.
  • Management expected an income tax rate of approximately 37% for the remainder of the fiscal year, subject to operating results and discrete tax events. No specific full-year sales or earnings guidance was provided.
  • AutoZone opened 41 net new stores during the quarter, including five in Mexico. It repurchased 1.42 million shares for $204.4 million. On December 16, 2009, after quarter-end, the board increased the cumulative repurchase authorization by $500 million to $8.4 billion.
  • Key disclosed risks include recessionary conditions, competition, product demand, financing availability and credit ratings, hiring and retention, consumer debt, weather, supplier costs, energy prices, transportation availability, construction delays, and regulatory changes. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
  • Unusual or notable items: pension expense was $2.4 million, compared with pension benefit income of $0.4 million a year earlier; management attributed higher expense primarily to actuarial losses following weaker-than-expected fiscal 2009 investment performance. Due to merchandise price deflation, the unrecorded inventory adjustment was $232.4 million, up from $223.0 million at fiscal year-end.

Important facts for investors to verify

  • Whether same-store sales growth, including commercial sales, persists and whether discretionary-category weakness worsens.
  • How much future cash generation depends on vendor financing and whether supplier terms remain available.
  • The refinancing plan and cost for the $199.3 million of notes due in November 2010 and the commercial paper borrowings.
  • The pace and funding of share repurchases relative to debt, cash needs, and planned store and systems investment.
  • Whether the expected approximately 37% tax rate and pension costs materially affect subsequent results.
  • The sustainability of reported margins and EPS growth, noting that repurchases contributed to per-share growth.

Ernst & Young reviewed the interim financial statements and reported no material modifications were known to be required; this was a review, not an audit.