AutoZone, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Twelve weeks ended November 18, 2017; compared with the twelve weeks ended November 19, 2016. Balance-sheet figures are compared with August 26, 2017. The company operates automotive-parts retail and distribution locations, plus ALLDATA and e-commerce businesses. Results are seasonal and this quarter is not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2018 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $2.589 billion | $2.468 billion | +4.9% |
| Gross profit / margin | $1.366 billion / 52.8% | $1.302 billion / 52.7% | Margin +0.1 percentage point |
| Operating profit | $468.8 million | $458.9 million | +2.1% |
| Net income | $281.0 million | $278.1 million | +1.0% |
| Diluted EPS | $10.00 | $9.36 | +6.8% |
| Operating cash flow | $565.0 million | $406.5 million | +$158.5 million |
| Capital expenditures | $110.3 million | $97.9 million | +$12.4 million |
- Domestic same-store sales increased 2.3%; new domestic stores contributed $169.7 million in sales. Domestic commercial sales rose 6.7%, or $30.6 million.
- SG&A increased to $897.1 million from $842.6 million and rose as a share of sales to 34.6% from 34.1%. Management cited hurricane-related costs and occupancy-cost deleverage. Gross margin was described as essentially flat: higher merchandise margins were offset by shrink.
- Interest expense increased to $38.9 million from $33.3 million, mainly reflecting higher weighted-average borrowing rates: 3.1% versus 2.6%. Effective tax rate was 34.6%, compared with 34.7%.
- Stock repurchases reduced weighted-average diluted shares; the company attributed $0.64 of current-quarter diluted EPS to repurchases since the prior comparable period.
Balance sheet, liquidity and capital allocation
- At November 18, cash was $257.7 million and inventory was $4.012 billion. Current assets were $4.717 billion versus current liabilities of $5.068 billion. Accounts payable was $4.327 billion; management reported accounts payable at 107.8% of gross inventory, down from 110.3% a year earlier.
- Long-term debt carrying value was $4.983 billion; debt before discounts and issuance costs was $5.006 billion, including $1.056 billion of commercial paper. Debt fair value was estimated at $5.052 billion. Adjusted debt/EBITDAR was 2.5x, unchanged from the prior-year comparison.
- The $2.0 billion revolving credit facility was extended to November 2022; available capacity was $1.997 billion. The company said it was in compliance with debt covenants. A separate $400 million 364-day facility expired and was not renewed.
- Operating cash flow benefited primarily from timing of accrued payments. Investing cash use was $134.7 million; financing cash use was $463.7 million, including $352.6 million of share repurchases and $99.0 million of net commercial-paper repayments. Cash declined by $35.6 million during the quarter.
- The company opened 20 net new locations. It repurchased 597,430 shares for $352.6 million, with $471.1 million remaining under the authorization at quarter-end. After quarter-end, it repurchased another 13,002 shares for $8.0 million.
Outlook, commentary and risks
- Management expected FY2018 investment in the business to be lower than FY2017, which included significant distribution-center construction. Planned investment areas included new locations, supply-chain infrastructure, existing locations and technology. No specific sales or earnings guidance was provided in the filing.
- Management continued store-delivery-frequency testing and the rollout of its mega-hub strategy to expand product availability. It noted U.S. miles driven were essentially flat through September 2017, while the average age of the U.S. vehicle fleet remained supportive of the industry.
- Management cited demand, weather, fuel and energy prices, competition, economic and credit conditions, foreign exchange and interest rates, labor, construction delays, cybersecurity, regulation and supplier raw-material costs as risks. Risk factors were reported as materially unchanged from the FY2017 Form 10-K.
- Legal matters include California hazardous-waste proceedings, a California emissions-parts inquiry, New Jersey groundwater remediation and employment-related lawsuits. The company stated it did not expect these matters to have a material adverse effect; outcomes and potential costs remain uncertain in some cases.
- Adoption of the new lease standard was expected to materially affect reported total assets and liabilities, but the impact had not yet been quantified. The company was also evaluating the revenue-recognition standard’s effects, including customer receivables, warranty costs, loyalty programs, gift cards and subscriptions.
- Quarterly statements received an independent accountant’s review, not an audit. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth, same-store sales and commercial-sales momentum persist, and how new-store contributions compare with underlying demand.
- Whether SG&A pressures, shrink and hurricane-related expenses ease, and whether gross-margin performance is sustained.
- Cash-flow quality: the extent to which the operating-cash-flow increase was driven by payment timing, and the effects of inventory and vendor-payment terms.
- Debt, refinancing capacity and interest-rate exposure; the filing estimated that a one-percentage-point rate increase would adversely affect annual pretax earnings and cash flow by $10.6 million at quarter-end variable-rate debt levels.
- Capital spending, store and distribution expansion, and continued substantial share repurchases relative to internally generated cash.
- Progress on accounting-standard implementation and developments in legal and environmental contingencies.