AutoZone, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended August 26, 2023 (52 weeks). This is an annual filing, not a standalone fourth-quarter report; the fourth quarter comprised 16 weeks and contributed 32.6% of annual sales and 34.2% of net income.
Business context
AutoZone is an automotive replacement-parts retailer and distributor operating 7,140 stores in the U.S., Mexico and Brazil. It also sells online, serves professional repair customers through commercial programs and offers ALLDATA automotive software. The company does not provide vehicle repair or installation services.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $17.46 billion | $16.25 billion |
| Gross profit / gross margin | $9.07 billion / 52.0% | $8.47 billion / 52.1% |
| Operating profit | $3.47 billion | $3.27 billion |
| Net income | $2.53 billion | $2.43 billion |
| Diluted EPS | $132.36 | $117.19 |
| Cash from operations | $2.94 billion | $3.21 billion |
| Capital expenditures | $796.7 million | $672.4 million |
| Debt at year-end | $7.67 billion | $6.12 billion |
- Sales rose 7.4%; management cited domestic same-store sales growth of 3.4%, new-store sales and growth in commercial sales. Total-company comparable sales increased 5.6% reported, or 4.6% at constant currency.
- Net income rose 4.1% and diluted EPS increased 12.9%. Share repurchases reduced weighted-average diluted shares to 19.1 million from 20.7 million and contributed an estimated $1.15 to FY2023 diluted EPS.
- Gross margin declined 17 basis points. Management attributed the pressure in part to a $44 million non-cash LIFO charge, versus $15 million in FY2022. SG&A was 32.1% of sales, compared with 32.0%.
- Net interest expense increased to $306.4 million from $191.6 million; average borrowings and the weighted-average borrowing rate both rose. Operating cash flow declined primarily because of unfavorable changes in accounts payable and accrued expenses.
- Year-end cash was $277.1 million; revolving-credit availability was $2.2 billion, excluding commercial paper borrowings. Working capital was negative $1.73 billion. The company reported a stockholders’ deficit of $4.35 billion, reflecting its capital structure and substantial share repurchases.
- FY2023 repurchases were $3.7 billion for 1.52 million shares. The company had $1.8 billion remaining under its authorization at year-end and repurchased a further $512.4 million of shares through October 16, 2023. It pays no common-stock dividend.
Changes, outlook and management commentary
- Domestic commercial sales grew 8.7%, or $368 million. The company ended the year with 98 domestic mega hubs, 20 more than a year earlier, and 7,140 total stores, including 197 net new stores during the year.
- Management expected fiscal 2024 investment in the business to increase versus FY2023, primarily for supply-chain initiatives, hub and mega-hub expansion, distribution-center projects and new stores. The filing provides no specific FY2024 revenue or earnings guidance.
- Management highlighted inflation, fuel costs, wage pressure, hiring and supply-chain disruptions as factors affecting the business. It cited growth in U.S. miles driven and an aging vehicle fleet as supportive industry indicators.
- Management expected adjusted debt to EBITDAR to return to pre-pandemic levels over time, with debt levels adjusted in line with earnings and its target leverage approach. The reported adjusted debt-to-EBITDAR ratio rose to 2.3x from 2.1x.
- CEO William Rhodes planned to relinquish the CEO and president roles in January 2024 and become Executive Chairman; the board intended to appoint CEO-elect Philip Daniele as CEO.
Risks, contingencies and unusual items
- Key risks include changes in demand tied to miles driven, fuel prices, weather, economic conditions and vehicle technology; competition, including online and omnichannel sellers; labor availability and wage inflation; and supplier, import and distribution disruptions.
- The filing also emphasizes cybersecurity, data privacy, IT-system reliability, self-insurance estimates, interest rates, credit-market access, foreign-exchange exposure, regulatory change and international expansion risks.
- Self-insurance reserves were $268.8 million; a 10% change in the liability estimate would have affected FY2023 net income by approximately $19.3 million. The auditor identified valuation of these reserves as a critical audit matter.
- The company reported ordinary-course legal matters and did not believe they would result in material liabilities. It had $51.0 million reserved for uncertain tax positions. Contractual obligations totaled $14.08 billion, including debt, lease obligations and interest payments.
- Debt increased during the year, including $1.75 billion of new senior notes and $606.2 million of net commercial-paper proceeds. The company repaid $800 million of notes. It reported covenant compliance and a 6.3x interest-coverage ratio against a 2.5x minimum.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of sales growth and comparable-sales growth reflects pricing, volume, currency and new-store contributions.
- Whether gross-margin pressure, wage inflation and higher borrowing costs persist, and how they affect earnings and cash generation.
- Whether operating cash flow recovers as working-capital movements normalize, particularly accounts payable and accrued expenses.
- How planned FY2024 capital investment translates into store productivity, inventory availability and returns, including mega-hub and distribution-center spending.
- Debt maturities, refinancing needs, commercial-paper exposure and the company’s leverage trajectory alongside continued share repurchases.
- Key assumptions behind self-insurance reserves, uncertain tax positions and other material estimates or contingencies.