AutoZone, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Twelve weeks ended November 23, 2013; comparisons are with the twelve weeks ended November 17, 2012. The interim financial statements are unaudited. AutoZone sells automotive parts and accessories through stores and online channels, and does not provide repair or installation services. At quarter-end, it operated 5,210 stores across the United States, Puerto Rico, Mexico, and Brazil.
Financial highlights
| Metric | Q1 FY2014 | Comparable prior period | Change |
|---|---|---|---|
| Net sales | $2,093.6 million | $1,991.0 million | +5.1% |
| Gross profit / gross margin | $1,085.7 million / 51.9% | $1,031.9 million / 51.8% | Margin +0.1 percentage point |
| Operating profit | $383.7 million | $363.3 million | +5.6% |
| Net income | $218.1 million | $203.5 million | +7.2% |
| Diluted EPS | $6.29 | $5.41 | +16.2% |
| Operating cash flow | $357.3 million | $318.3 million | +$39.1 million |
| Capital expenditures | $82.6 million | $80.4 million | +$2.2 million |
- SG&A was $702.0 million, or 33.5% of sales, versus $668.6 million, or 33.6%. Operating margin was approximately 18.3%, compared with 18.2%.
- Net interest expense rose to $42.4 million from $41.1 million. Average borrowings increased to $4.138 billion from $3.741 billion; average borrowing rates declined to 4.2% from 4.5%.
- Cash and equivalents were $125.9 million at November 23, 2013, down from $142.2 million at August 31, 2013. Current assets were $3.370 billion and current liabilities were $4.333 billion.
- Total debt was $4.174 billion, including $623.5 million of commercial paper; long-term debt on the balance sheet was $4.013 billion. Stockholders’ deficit was $1.721 billion.
- Financing activities used $290.8 million, including $291.5 million for share repurchases. Cash decreased by $16.3 million during the quarter.
Material changes and drivers
- Sales growth reflected new stores, more commercial programs and AutoAnything sales, with domestic same-store sales up 0.9%. Management reported total auto parts sales growth of 3.6%; new stores contributed $47.9 million in sales.
- Gross margin improved slightly, mainly from lower acquisition costs, partly offset by a 37-basis-point impact from the AutoAnything acquisition.
- SG&A as a share of sales improved mainly because of the timing of advertising expenses.
- Share repurchases since the comparable prior-year period increased current-quarter diluted EPS by $0.60, according to management. The company repurchased 678,143 shares for $291.5 million during the quarter.
- Operating cash flow increased mainly due to higher net income and the timing of tax payments. Accounts payable were 115.6% of gross inventory, versus 111.8% a year earlier.
Outlook, risks and contingencies
- No specific sales, earnings, or EPS guidance was provided. Management expected fiscal 2014 investment to increase versus fiscal 2013, primarily for new stores and improvements to stores and infrastructure. Store development was shifting toward ground leases and land purchases, which generally require higher initial capital.
- Management cited challenging consumer cash flows, elevated gasoline costs, payroll-tax changes, weather, competition, product demand, labor, supplier costs, financing access, and economic conditions as factors that could affect results. The business is seasonal, with generally lower sales in December and January; the quarter’s results are not necessarily indicative of the full year.
- Management was testing changes to hub-store inventory and store product availability. Failure and maintenance categories represented approximately 84% of sales.
- After quarter-end, the revolving credit facility was increased from $1.0 billion to $1.25 billion and its maturity extended from September 2016 to September 2017; capacity may be increased to $1.5 billion subject to approval. At quarter-end, $963.2 million was available under the facility. The company reported covenant compliance.
- Adjusted debt to EBITDAR was 2.5:1, unchanged year over year. A one-percentage-point increase in interest rates would have an estimated annual pretax earnings and cash-flow impact of $6.2 million on variable-rate debt.
- The board increased the share repurchase authorization by $750 million on December 17, 2013. After the increase, $926.9 million remained available; no shares were repurchased after quarter-end through the filing’s stated date.
- New Jersey environmental authorities intended to issue an amended directive asserting liability for off-site contamination impacts. AutoZone disputed liability and said it did not expect remediation obligations to be material, although additional costs could not then be determined. The company also disclosed employee wage-and-hour and termination lawsuits, which it did not expect to be material.
- Management said risk factors were not materially changed from the FY2013 Form 10-K. The independent accountant performed an interim review, not an audit, and reported no material modifications it believed necessary for GAAP presentation.
Most important facts for investors to verify
- Whether modest same-store sales growth and new-store contributions sustain revenue growth in subsequent quarters.
- Whether margin trends hold as acquisition impacts, advertising timing, and store and supply-chain investment evolve.
- How ongoing buybacks and the company’s debt-funded capital structure affect EPS, liquidity, and leverage.
- Whether commercial paper refinancing, the amended revolving facility, and the near-term senior-note maturity are managed as planned.
- Whether the New Jersey remediation matter or employee litigation develops into a material contingency.
- How the planned higher fiscal 2014 investment and seasonal sales pattern affect cash flow and capital needs.