AutoZone, Inc. — FY2012 Form 10-K
Business context and reporting period. AutoZone operates automotive-parts retail and distribution businesses, including commercial sales, e-commerce and ALLDATA software; it does not provide vehicle repair or installation services. This 10-K covers the 52-week fiscal year ended August 25, 2012. The fourth quarter comprised 16 weeks. At year-end, the company operated 5,006 stores: 4,685 in the U.S. and Puerto Rico and 321 in Mexico.
Key financial results
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Net sales | $8.604 billion | $8.073 billion | Up 6.6% |
| Domestic comparable-store sales | Up 3.9% | Up 6.3% | Growth moderated |
| Gross profit / margin | $4.432 billion / 51.5% | $4.119 billion / 51.0% | Margin up 0.5 percentage point |
| Operating profit / margin | $1.629 billion / 18.9% | $1.495 billion / 18.5% | Operating profit up 9.0% |
| Net income | $930.4 million | $849.0 million | Up 9.6%; record |
| Diluted EPS | $23.48 | $19.47 | Up 20.6%; buybacks added approximately $0.96 to FY2012 EPS |
| Operating cash flow | $1.224 billion | $1.292 billion | Down about 5.2% |
| Capital expenditures | $378.1 million | $321.6 million | Up about 18% |
| Debt at year-end | $3.768 billion | $3.352 billion | Up $416.5 million |
| Cash and cash equivalents | $103.1 million | $97.6 million | Current liabilities exceeded current assets by $676.6 million |
Gross margin improvement reflected higher merchandise margins and lower shrink expense. SG&A rose to 32.6% of sales from 32.5%, principally due to higher self-insurance costs, partly offset by lower incentive compensation. Net interest expense increased to $175.9 million from $170.6 million; the effective tax rate was 36.0% versus 35.9%.
Material changes and operating performance
- FY2012 sales growth reflected 3.9% domestic comparable-store growth and $214.2 million of sales from new stores. Higher transaction value drove comparable-store growth, partly offset by lower transaction counts.
- The company opened 193 stores, ending the year with 5,006 locations, compared with 4,813 a year earlier. Domestic commercial programs expanded from 2,659 to 3,053 stores.
- Failure and maintenance categories represented approximately 83% of sales. Failure-related products were the strongest performers; management attributed softer maintenance sales in part to unusually mild winter weather.
- Stock repurchases were $1.363 billion, versus $1.467 billion in FY2011. The reduced share count contributed to faster EPS growth than net-income growth.
- Stockholders’ deficit widened to $1.548 billion from $1.254 billion, amid substantial repurchases. The company paid no common-stock dividend.
Liquidity, debt and capital allocation
Operating cash flow was below the prior year, which management attributed to working-capital movements, particularly inventory net of payables, partly offset by higher net income. Cash flow less capital expenditures was approximately $845.9 million. Financing cash outflow was $843.4 million, reflecting primarily treasury-stock purchases. Accounts payable were 111.4% of inventory, slightly below 111.7% in FY2011; management said extended vendor payment terms supported this ratio.
AutoZone issued $500 million of 3.700% senior notes due 2022, using proceeds partly to repay commercial paper. Its $1.0 billion revolving facility expires in September 2016; reported available capacity at year-end was $454.9 million after commercial paper and certain letters of credit. The company reported a 4.58:1 interest-coverage ratio against a 2.50:1 minimum and compliance with debt covenants. Adjusted debt to EBITDAR, a company-defined non-GAAP measure, was 2.5x versus 2.4x.
Contractual obligations totaled $6.653 billion, including $3.718 billion of long-term debt principal, $1.910 billion of operating leases and $713.4 million of interest payments. The frozen defined-benefit pension plans had a $123.8 million net obligation, up from $84.8 million; FY2013 pension contributions were expected to be approximately $9 million.
Outlook, commentary and risks
Management provided no specific sales or earnings guidance in the supplied filing text. It expected FY2013 investment in the business to increase, primarily for new stores and improvements to existing stores and infrastructure. The company noted that store investment depends on property ownership or lease mix and location, and expected capital spending per store to remain elevated as development shifted toward ground leases and land purchases.
Management said recessionary conditions and high unemployment may encourage consumers to keep older vehicles longer and repair them, supporting demand, but could not predict how long this pattern would continue. It also cited elevated gasoline prices as a pressure on customer spending, flat-to-slowly improving miles driven, and an aging vehicle fleet as relevant demand factors.
- Principal business risks include demand and economic conditions, competition and pricing, commercial-market growth, employee hiring and retention, supplier availability and product safety, and execution of store expansion and supply-chain operations.
- Additional risks include credit-market access and borrowing costs, energy and raw-material costs, severe weather or other business interruptions, cybersecurity and systems disruptions, and possible healthcare-cost increases.
- Interest-rate sensitivity: a 1 percentage point increase would have reduced pre-tax earnings and cash flows by approximately $5 million at the reported variable-debt level. The company also had Mexican-peso exposure; a hypothetical 10% adverse currency move implied an estimated $29 million reduction in the translated value of Mexican net assets.
- Environmental matter: New Jersey regulators indicated they may assert liability for off-site groundwater impacts near a former service-station site. Costs were not yet ascertainable; management did not expect a material financial effect and believed it could qualify for reimbursement of up to 75% of eligible remediation costs, subject to state clarification.
- The company also faced employee wage-and-hour and termination lawsuits, which management did not believe would result in material liabilities. Its self-insurance reserves and pension measurements depend on estimates and actuarial assumptions.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether comparable-store sales can sustain growth as transaction counts, vehicle miles driven, fuel prices and the age of the vehicle fleet change.
- Whether the gross-margin improvement is durable, and how self-insurance costs, shrink, merchandise costs and product mix affect margins.
- How working-capital requirements, vendor payment terms and inventory investment affect operating cash flow and liquidity.
- How debt-funded repurchases and planned higher capital investment affect leverage, borrowing capacity and covenant headroom.
- Developments in the environmental matter, employee litigation, pension funding and the significant estimates underlying insurance and tax reserves.