AZO

Business Context and Reporting Period

Company: AutoZone, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: August 29, 2009 (52 weeks)
Business Overview: AutoZone is the nation's leading retailer and distributor of automotive replacement parts and accessories. As of the reporting date, the company operated 4,417 stores (4,229 domestic, 188 in Mexico). The company serves both Do-It-Yourself (DIY) customers and commercial repair shops through its "Commercial" sales program, which operates out of 2,303 domestic stores.

Key Financial Metrics

Note: Fiscal 2008 included a 53rd week. Excluding the 53rd week, Fiscal 2009 net sales increased 6.6% and net income increased 5.0% over the prior year.

Material Changes vs. Prior Period

• Sales Growth: Net sales increased 4.5% year-over-year. Excluding the 53rd week in 2008, sales grew 6.6%, driven by a 4.4% increase in domestic same-store sales and $165.5 million in sales from new stores.
• Profitability: Net income rose 2.4% to $657 million. Diluted earnings per share increased 16.8% to $11.73, significantly aided by share repurchases which reduced the share count.
• Debt Levels: Total debt increased by approximately $477 million to $2.73 billion. This increase was due to higher average borrowing levels and the issuance of $500 million in Senior Notes in July 2009 to refinance commercial paper and prepay a term loan.
• Equity Position: Stockholders' equity turned negative to a deficit of $433.1 million, primarily due to $1.3 billion in treasury stock repurchases during the fiscal year.
• Store Count: The company added 137 net new domestic stores and 40 new Mexico stores, bringing the total to 4,417.

Guidance, Outlook, and Risks

Management Commentary: Management reported a "solid performance" with record earnings. They attribute growth to favorable macroeconomic factors, including lower gas prices (which increased consumer spending capacity) and a higher number of vehicles seven years or older on the road. The company expects to continue investing in new store development and infrastructure enhancements.

Outlook: The company anticipates investing consistent with historical rates in fiscal 2010, primarily for new store development. They expect to rely on internally generated funds and available borrowing capacity to support capital expenditures and stock repurchases.

Risks and Contingencies:

• Credit Markets: Deterioration in global credit markets could increase borrowing costs and limit access to short-term debt.
• Economic Conditions: Continued recessionary conditions could lead to job losses and deferred vehicle maintenance by customers.
• Competition: The industry is highly competitive; consolidation among competitors could negatively impact market share and pricing power.
• Legal Proceedings: The company is a defendant in a Robinson-Patman Act lawsuit filed by over 200 plaintiffs. The company believes the suit is without merit but cannot estimate a potential loss.
• Foreign Currency: A 30% decrease in the Mexican peso against the U.S. dollar during 2009 resulted in significant foreign currency translation losses recorded in accumulated other comprehensive income.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the 2.50:1 consolidated interest coverage ratio required by the $800 million revolving credit facility (reported as 4.19:1).
• Share Repurchase Program: Confirm the remaining authorization under the $7.9 billion repurchase program (approximately $309 million remaining as of August 29, 2009).
• Same-Store Sales Trend: Monitor the sustainability of the 4.4% same-store sales growth in the context of ongoing economic recovery and vehicle age demographics.
• Legal Exposure: Track the status of the "Coalition for a Level Playing Field" litigation regarding alleged discriminatory pricing.
• Working Capital: Analyze the shift from positive working capital in 2008 to a negative position in 2009, driven by increased current liabilities and inventory levels.