AutoZone, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Twelve weeks ended February 11, 2017; year-to-date figures cover the twenty-four weeks ended that date. Comparatives are the corresponding periods ended February 13, 2016. AutoZone operates automotive parts retail and distribution locations, along with ALLDATA and online businesses. Results are unaudited interim figures; the filing cautions that they are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | 24 weeks FY2017 | 24 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $2,289.2 million | $2,257.2 million | $4,757.1 million | $4,643.2 million |
| Gross profit | $1,205.5 million | $1,190.6 million | $2,507.1 million | $2,443.5 million |
| Gross margin | 52.7% | 52.7% | 52.7% | 52.6% |
| Operating profit | $384.0 million | $382.7 million | $842.9 million | $820.7 million |
| Net income | $237.1 million | $228.6 million | $515.3 million | $486.7 million |
| Diluted EPS | $8.08 | $7.43 | $17.45 | $15.72 |
| Operating cash flow | — | — | $563.9 million | $562.4 million |
| Capital expenditures | — | — | $216.1 million | $186.6 million |
Quarterly sales rose 1.4%; diluted EPS rose 8.8%. Year-to-date sales increased 2.5% and diluted EPS increased 11.0%. Q2 operating expenses were $821.6 million (35.9% of sales), versus $807.9 million (35.8%); net interest expense was $34.2 million, up from $32.8 million. The reported Q2 gross-margin discussion cites a nine-basis-point decline, although both periods round to 52.7% in the statements.
At February 11, 2017, cash was $210.6 million, merchandise inventory $3.902 billion, current assets $4.493 billion and current liabilities $4.784 billion. Long-term debt was $5.152 billion; stockholders’ deficit was $1.827 billion. Commercial paper borrowings were $1.823 billion, with $1.958 billion available under revolving credit facilities and no revolver borrowings. Management reported compliance with debt covenants. The adjusted debt/EBITDAR ratio was 2.6x, versus 2.5x a year earlier; trailing-four-quarter ROIC was 31.0%, unchanged.
Year-to-date investing cash outflow was $202.7 million and financing cash outflow was $336.6 million. Financing included $560.6 million of treasury-stock purchases and net commercial-paper proceeds of $625.6 million. Cash increased $20.9 million to $210.6 million. Operating cash flow less capital expenditures was approximately $347.8 million, versus $375.8 million in the prior-year period.
Material changes and management commentary
- Q2 sales growth was driven in part by $35.1 million of sales from new domestic stores; domestic commercial sales rose $29.1 million, or 7.2%. Year-to-date, domestic commercial sales increased $56.4 million, or 6.8%.
- Management said delayed tax refunds significantly weighed on late-quarter sales: IRS refunds during Q2 were $24.4 billion versus $69.9 billion a year earlier, and domestic same-store sales declined 6.3% in the quarter’s final three weeks versus the comparable weeks.
- Management attributed Q2 gross-margin pressure to higher shrink (34 basis points) and supply-chain costs tied to inventory initiatives (29 basis points), partly offset by lower acquisition costs. Year-to-date margin improved slightly, reflecting higher merchandise margins partly offset by supply-chain costs and shrink.
- Q2 effective tax rate fell to 32.2% from 34.7%; year-to-date it was 33.5% versus 35.3%. Adoption of share-based-payment accounting guidance increased diluted EPS by $0.37 for Q2 and $0.40 year to date. Stock repurchases since the comparable prior-year period added $0.39 and $0.85 to diluted EPS, respectively.
- AutoZone opened 58 net new locations year to date, compared with 67 in the prior-year period. Capital spending increased, largely for two domestic distribution centers under construction and a Mexico distribution center completed in FY2017. Management expects FY2017 investment to exceed FY2016, primarily for locations, supply-chain infrastructure, existing locations and technology.
Outlook, risks and unusual items
- The filing provides no specific sales, earnings or margin guidance. Management cautions that results are seasonal and interim results may not predict full-year performance; sales are generally highest February through September.
- Management cited fuel prices, tax-refund timing, weather, consumer and industry economic conditions, product demand, competition, financing access, labor, construction delays, cybersecurity and supplier costs among factors that could affect results. A 1% increase in interest rates on the $1.823 billion of variable-rate debt would have an estimated $18.2 million annual pretax impact.
- The company expects approximately $17.5 million of pension-plan contributions during the remainder of FY2017; actual funding could change with interest rates, asset returns or management actions.
- California environmental and aftermarket-emissions matters, a New Jersey groundwater-remediation dispute and employment-related lawsuits remain among disclosed contingencies. Management does not expect these matters to have a material adverse effect; outcomes for certain matters cannot be predicted. The filing reports no material changes to previously disclosed risk factors.
- The board increased the share-repurchase authorization by $750 million on March 21, 2017, after quarter-end. The company also reported $119.6 million of repurchases after February 11.
Important facts for investors to verify
- Whether sales and same-store trends recovered after the tax-refund timing disruption, and how new-store growth and commercial sales contribute to comparable growth.
- Whether inventory initiatives, shrink and supply-chain costs continue to pressure gross margin and working capital; accounts payable were 105.5% of gross inventory, down from 109.0% a year earlier.
- How EPS growth is affected by the lower tax rate from the accounting change and continued share repurchases, apart from underlying operating performance.
- Debt and refinancing exposure: commercial paper levels, variable-rate sensitivity, revolving-credit availability, and the 2.6x adjusted debt/EBITDAR ratio.
- Execution and returns from higher planned capital investment, distribution-center projects, store openings and ongoing repurchases; assess cash generation against these uses.
- Developments in disclosed legal matters and pension funding. The interim financial statements received an independent accountant’s review, not an audit opinion.