AutoZone, Inc. — Form 10-Q Summary
Business context and reporting period
AutoZone operates automotive parts and accessories stores and distribution activities, with 4,832 stores in the U.S. (including Puerto Rico) and Mexico as of November 19, 2011. It also sells ALLDATA software and products online; it does not provide repair or installation services. This filing covers the 12 weeks ended November 19, 2011, compared with the 12 weeks ended November 20, 2010. The interim statements are unaudited; the auditor performed a review, not an audit.
Financial performance and position
| Metric | Current period | Prior comparable period |
|---|---|---|
| Net sales | $1,924.3 million | $1,791.7 million |
| Gross profit / margin | $983.6 million / 51.1% | $907.7 million / 50.7% |
| Operating profit | $340.9 million | $306.1 million |
| Net income | $191.1 million | $172.1 million |
| Diluted EPS | $4.68 | $3.77 |
| Operating cash flow | $342.3 million | $357.4 million |
| Capital expenditures | $61.9 million | $45.8 million |
- Sales rose 7.4%; domestic same-store sales increased 4.6%. Management attributed growth mainly to higher transaction values, partly offset by fewer transactions, and $47.3 million of sales from new stores.
- Gross margin increased 0.4 percentage points, supported by distribution-cost leverage, lower shrink, and slightly higher merchandise margins. SG&A declined to 33.4% of sales from 33.6%.
- Net income grew approximately 11.1% and diluted EPS 24.0%. Management said share repurchases since the prior-year period added $0.48 to current-quarter diluted EPS.
- Cash from operations decreased $15.1 million, principally due to higher income-tax payments and a smaller benefit from inventory net of payables. Cash used in investing was $61.9 million; cash used in financing was $280.7 million, including $309.8 million of stock repurchases. Cash ended at $96.7 million.
- At November 19, 2011, total debt was approximately $3.354 billion, including $568.9 million of commercial paper and $35.4 million of short-term borrowings. Long-term debt was $3.319 billion. Total current liabilities ($3.579 billion) exceeded current assets ($2.843 billion); accounts payable was $2.844 billion. Stockholders’ deficit was $1.347 billion.
- Management reported trailing-four-quarter ROIC of 32.1%, versus 28.6% a year earlier, and adjusted debt/EBITDAR of 2.4x, versus 2.3x.
Material changes versus prior period
- Domestic same-store sales increased 4.6%; management reported growth among both retail and commercial customers.
- Interest expense rose to $39.1 million from $37.3 million. Average borrowings increased to $3.287 billion from $2.861 billion, while average borrowing rates declined to 4.8% from 5.3%.
- Capital expenditures increased, in part because store development shifted toward ground leases and land purchases. AutoZone opened 19 net new stores, compared with 18.
- In September 2011, AutoZone amended its revolving credit facility, increasing capacity from $800 million to $1.0 billion and extending expiry to September 2016. The company reported $399.4 million of available capacity under the facility at quarter-end; the filing separately states $996.6 million of availability excluding commercial-paper borrowings.
- The board increased the cumulative share-repurchase authorization by $750 million to $11.15 billion. At quarter-end, $658.9 million remained authorized.
Outlook, commentary, risks, and contingencies
- Management expects fiscal 2012 capital expenditures to rise 20%–25% versus fiscal 2011, focused mainly on new stores and improvements to stores and infrastructure. The filing gives no specific earnings or sales guidance.
- Management said the business is seasonal, with generally lower sales in December and January, and cautioned that first-quarter results are not necessarily indicative of the full fiscal year. It cited older vehicles and repair needs as supportive of demand, while warning that higher gasoline prices may constrain customer discretionary spending.
- Management identified risks including economic and credit conditions, competition, demand, employee hiring and retention, inflation, energy and supplier costs, weather, construction delays, financing access, and regulatory changes.
- The Robinson-Patman Act litigation dismissal was appealed by 143 plaintiffs to the Second Circuit. AutoZone says it believes the suit is without merit but cannot estimate a loss or range of loss.
- AutoZone is addressing potential off-site vapor-intrusion impacts related to contamination at a New Jersey property. Costs cannot currently be determined; management does not currently expect them to be material and is seeking clarification on potential state reimbursement.
- The company reported compliance with debt covenants and effective disclosure controls. A 1-percentage-point increase in variable interest rates would have an estimated $6.0 million annual adverse pretax impact at reported borrowing levels.
Important facts for investors to verify
- Whether same-store sales growth and higher transaction values continue, particularly given lower transaction counts and sensitivity to fuel prices and economic conditions.
- How planned 20%–25% capital-spending growth affects cash generation, borrowing, and store returns.
- Debt refinancing and liquidity, including the differing facility-availability figures and upcoming maturities described in the filing.
- Progress and potential exposure from the appellate litigation and New Jersey environmental matter.
- The pace and effect of stock repurchases on share count, EPS, and the company’s stockholders’ deficit.