AutoZone, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2022, the 12 weeks ended May 7, 2022, with year-to-date results for the 36 weeks ended that date. Comparisons are with the periods ended May 8, 2021. AutoZone operates automotive-parts stores in the U.S., Mexico and Brazil, alongside ALLDATA and e-commerce businesses. The interim statements were reviewed, not audited.
Financial performance
Amounts below are in millions, except per-share data, percentages and ratios.
| Metric | 12 weeks ended May 7, 2022 | Prior-year quarter | 36 weeks ended May 7, 2022 | Prior-year 36 weeks |
|---|---|---|---|---|
| Net sales | $3,865.2 | $3,651.0 | $10,903.9 | $9,716.1 |
| Gross profit / margin | $2,006.4 / 51.9% | $1,914.9 / 52.4% | $5,716.8 / 52.4% | $5,149.9 / 53.0% |
| Operating profit | $785.7 | $803.5 | $2,166.9 | $1,900.5 |
| Net income | $592.6 | $596.2 | $1,619.6 | $1,384.5 |
| Diluted EPS | $29.03 | $26.48 | $76.90 | $59.80 |
| Net interest expense | $41.9 | $45.0 | $127.6 | $137.2 |
| Cash from operations | Not separately reported for the quarter | $1,983.1 | $2,230.3 |
- Quarterly sales increased 5.9%; domestic same-store sales grew 2.6%. Domestic commercial sales rose 26.0% to about $1.0 billion, representing approximately 30% of domestic auto-parts sales. New stores contributed $69.6 million in sales.
- Quarterly gross margin declined 0.5 percentage point, primarily because commercial sales grew faster and carry lower margins. SG&A increased to 31.6% of sales from 30.4%, reflecting payroll deleverage against the prior year’s unusually strong comparable sales. Operating profit fell 2.2% and net income fell 0.6%, while diluted EPS rose 9.6%, aided by fewer weighted-average shares.
- For the first 36 weeks, sales rose 12.2%, domestic same-store sales grew 9.5%, and domestic commercial sales increased 28.9% to $2.8 billion. Gross margin declined 0.6 percentage point. SG&A improved to 32.6% of sales from 33.4%, partly because the prior year included about $46 million of pandemic-related expenses. Net income increased 17.0% and diluted EPS increased 28.6%.
- Quarterly effective tax rate was 20.3%, versus 21.4%; year-to-date it was 20.6%, versus 21.5%. The company attributed the lower rates largely to increased tax benefits from exercised stock options.
Balance sheet, cash flow and capital allocation
- At May 7, 2022, cash and cash equivalents were $263.0 million; current assets were $6.25 billion and current liabilities were $8.06 billion. Merchandise inventory was $5.31 billion, up from $4.64 billion at fiscal year-end. Accounts payable was $6.79 billion; payables equaled 127.9% of gross inventory, compared with 123.9% a year earlier.
- Long-term debt, net of discounts and issuance costs, was $6.06 billion, versus $5.27 billion at August 28, 2021. The balance included $1.28 billion of commercial paper; total debt before discounts and issuance costs was $6.08 billion. Stockholders’ deficit was $3.39 billion, reflecting the company’s substantial share repurchases and treasury-stock retirement.
- Year-to-date operating cash flow was $1.98 billion, down from $2.23 billion, primarily due to greater inventory investment net of payables and lower accrued benefits and withholdings. Capital expenditures were $369.4 million. Investing cash outflow was $360.7 million; financing cash outflow was $2.53 billion. Cash declined by $908.3 million from fiscal year-end.
- AutoZone repurchased 1.746 million shares for $3.36 billion during the 36 weeks. The board added $2.0 billion to the buyback authorization, leaving $2.1 billion available at May 7. The company subsequently repurchased 103,726 shares for $203.6 million through June 3.
- The revolving facility provides $2.25 billion of capacity, with $2.2 billion available at May 7 before considering commercial paper. There were no revolving borrowings. The company said it could refinance commercial paper and $300 million of notes due January 2023 using the facility. It reported compliance with debt covenants. Adjusted debt to EBITDAR was 2.1x, compared with 2.0x a year earlier.
Outlook, management commentary and risks
- No specific sales, earnings or EPS guidance was provided. Management said fiscal 2022 investment in the business was expected to increase versus fiscal 2021, principally for stores and supply-chain capacity, including hubs, mega hubs and distribution centers.
- Management described sales as remaining at historically high levels since the start of the COVID-19 pandemic, while cautioning that the pandemic’s longer-term effects on demand, product availability, store hours and workforce availability remain uncertain. The company said failure- and maintenance-related categories represented approximately 84% of quarterly sales, with no fundamental mix shift.
- Management cited inflation, fuel and energy costs, wage rates, hiring and retention, supply-chain disruption, inventory availability, competition, weather, miles driven, recessionary conditions, consumer debt, credit markets and financing access among factors that could affect results. It noted U.S. miles driven increased 7.9% through March 2022 year over year, but the continuation and effects of that trend were uncertain. The average U.S. light-vehicle age was reported as 12.2 years.
- Extended vendor payment terms support the company’s high accounts-payable-to-inventory ratio. Management warned that vendor financing availability or a credit downgrade could lead to shorter payment terms and greater working-capital needs.
- Other exposures include variable-rate debt: $1.3 billion was outstanding, and a one-percentage-point rate increase was estimated to reduce annual pretax earnings and cash flow by $12.8 million. Senior-note provisions can adjust rates after specified rating downgrades; debt may be accelerated after covenant breaches, defaults or certain change-of-control events.
- The company is involved in routine legal matters, including employee wage-and-hour and termination lawsuits. Management did not believe these matters would result in material liabilities. No material risk-factor changes were reported. Disclosure controls were assessed as effective, with no material change in internal controls reported.
Important facts for investors to verify
- Whether commercial-sales growth can continue without further pressure on gross margin, and whether operating expenses regain leverage.
- Inventory growth, supplier payment terms and the sustainability of accounts payable exceeding gross inventory.
- Commercial-paper refinancing capacity, upcoming debt maturities, interest-rate sensitivity and leverage targets.
- The cash-flow and balance-sheet effects of continued large share repurchases alongside planned store and supply-chain investment.
- Whether macroeconomic, pandemic, labor and supply-chain conditions affect demand, product availability or costs, and how the cited legal matters develop.