AutoZone, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Second quarter (12 weeks) and first half (24 weeks) ended February 11, 2023; comparisons are with the periods ended February 12, 2022. Fiscal year ends August 26, 2023. AutoZone operates automotive parts retail and distribution businesses in the U.S., Mexico and Brazil, alongside ALLDATA and e-commerce operations.
Financial performance
| Metric | Q2 FY2023 | Year-over-year change | First half FY2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $3.691 billion | +9.5% | $7.676 billion | +9.1% |
| Gross profit | $1.930 billion | +8.1% | $3.925 billion | +5.8% |
| Gross margin | 52.3% | 53.0% prior year | 51.1% | 52.7% prior year |
| Operating profit | $670.0 million | +6.9% | $1.393 billion | +0.9% |
| Net income | $476.5 million | +1.0% | $1.016 billion | -1.1% |
| Diluted EPS | $24.64 | +10.5% | $52.12 | +8.5% |
Q2 domestic same-store sales increased 5.3%; domestic commercial sales rose 13.1% and represented approximately 29.5% of domestic auto parts sales. For the first half, domestic same-store sales increased 5.5% and commercial sales rose 14.1%. Q2 SG&A was 34.1% of sales versus 34.4% a year earlier. Interest expense increased to $65.6 million in Q2 and $123.3 million for the first half, reflecting higher average borrowings and borrowing rates.
Cash flow and investment: First-half operating cash flow was $1.148 billion, roughly level with the prior year’s $1.140 billion. Capital expenditures were $259.2 million versus $208.1 million; investing cash outflow was $270.0 million. AutoZone opened 71 net new stores versus 48 in the comparable period. Financing cash outflow was $844.7 million, including $1.8 billion of share repurchases.
Liquidity and debt: At February 11, cash and equivalents were $301.3 million; long-term debt carrying value was $7.042 billion, including $831.0 million of commercial paper. The company reported $2.2 billion of revolving-credit availability before commercial paper borrowings and no revolver borrowings. Current liabilities were $8.615 billion versus current assets of $6.795 billion. Stockholders’ deficit was $4.184 billion. Adjusted debt to EBITDAR, a non-GAAP measure, was 2.3x versus 2.0x a year earlier.
Material changes and unusual items
- Gross margin declined year over year, including a non-cash LIFO charge of $10 million in Q2 and $91 million in the first half, primarily associated with rising freight costs. Management also cited supply-chain costs and faster commercial-business growth as pressures on margin.
- Excluding the LIFO charge, management reported Q2 adjusted operating profit of $680.0 million, adjusted net income of $484.2 million and adjusted diluted EPS of $25.04. First-half adjusted net income was $1.086 billion and adjusted diluted EPS was $55.70. These are company-defined non-GAAP measures.
- On January 27, 2023, AutoZone issued $450 million of 4.500% senior notes due 2028 and $550 million of 4.750% senior notes due 2033; proceeds partly repaid commercial paper. It repaid $300 million of notes due January 2023. The revolving facility was extended to November 2027.
- The company repurchased 764,000 shares for approximately $1.8 billion during the first half and had $1.8 billion remaining under its authorization at quarter end. It repurchased a further 83,500 shares for $210 million through March 10, 2023.
Outlook, commentary and risks
Management expects FY2023 investment in the business to exceed FY2022 levels, primarily for supply-chain initiatives, hub and mega-hub expansion, distribution centers and new stores. It expects operating cash generation and available credit to support operations, investment, debt repayments and repurchases; no specific sales or earnings guidance is provided.
Management noted inflation, freight and wage costs, supply-chain disruption, hiring, fuel prices, weather and economic conditions as factors affecting results, and said the duration and impact of macroeconomic trends are uncertain. U.S. miles driven were down 2.6% through December 2022 versus the comparable period; management also cited an aging vehicle fleet as supportive of industry demand. It cautioned that interim results are not necessarily indicative of full-year results and that sales are seasonal.
Other risks include access to financing, interest rates, inventory availability, vendor payment terms, credit-rating changes, cybersecurity and IT interruptions, and legal and self-insurance exposures. The filing reports employee-related class-action litigation but says management does not currently expect these matters, individually or collectively, to result in material liabilities. AutoZone reported compliance with debt covenants and effective disclosure controls; the interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether margin pressure from LIFO, freight, supply-chain costs and commercial mix persists, and how much adjusted results depend on excluding non-cash LIFO charges.
- Debt and interest-cost trajectory, including commercial-paper refinancing capacity, the 2023 note maturity and the effect of higher rates.
- Cash generation and capital allocation relative to elevated store and supply-chain investment and substantial share repurchases.
- Inventory and supplier payment-term developments, including the unusually high accounts-payable-to-inventory ratio of 127.7%.
- Exposure to macroeconomic and operating risks, as well as the status of disclosed litigation and insurance contingencies.