Business Context and Reporting Period
Company: AutoZone, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Twelve and thirty-six weeks ended May 7, 2005.
Business Overview: AutoZone is the nation's leading retailer of automotive parts and accessories, serving primarily do-it-yourself (DIY) customers and commercial repair garages. As of May 7, 2005, the company operated 3,505 domestic stores and 73 stores in Mexico.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended May 7, 2005 | 36 Weeks Ended May 7, 2005 |
|---|---|---|
| Net Sales | $1,338,387 | $3,828,645 |
| Gross Profit | $673,103 | $1,876,275 |
| Gross Margin % | 50.3% | 49.0% |
| Operating Profit | $259,462 | $624,494 |
| Net Income | $147,789 | $364,404 |
| Diluted EPS | $1.86 | $4.53 |
| Operating Cash Flow (36 weeks) | $403,511 | |
| Capital Expenditures (36 weeks) | $186,939 | |
| Long-Term Debt | $1,914,525 | |
| Cash and Equivalents | $77,378 |
Material Changes vs. Prior Period
- Sales Performance: For the twelve weeks ended May 7, 2005, net sales decreased 1.6% ($21.6 million) compared to the prior year, driven by a 5% decline in comparable store sales. However, for the thirty-six week period, net sales increased 0.7% ($27.3 million), driven by new store openings which offset a 3% decline in comparable store sales.
- Profitability: Net income increased 3.1% ($4.4 million) for the quarter and 2.1% ($7.6 million) for the thirty-six week period. Diluted earnings per share increased 10.5% and 11.7% respectively, significantly aided by share repurchases.
- Expenses: Operating expenses for the thirty-six weeks included a $40.3 million pre-tax adjustment related to a change in lease accounting policy (Note K). Excluding this, operating expenses declined due to lower bad debt and efficiency initiatives.
- Tax Rate: The effective income tax rate for the thirty-six weeks was 34.3%, down from 37.5% in the prior year, primarily due to a $12 million one-time tax benefit from the repatriation of foreign earnings under the American Jobs Creation Act of 2004.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates fiscal year capital expenditures at $250 million, primarily for approximately 200 new store openings and a new distribution facility in Texas.
- Stock Repurchases: The Board has authorized up to $4.4 billion in stock repurchases. As of May 7, 2005, $416.5 million remained available under the program. The company repurchased 3.6 million shares for $308.6 million during the thirty-six week period.
- Liquidity: The company maintains $1.0 billion in revolving credit facilities, with $598.6 million available capacity as of May 7, 2005. Credit ratings are BBB+ (S&P) and Baa2 (Moody's).
- Legal Proceedings: AutoZone is a defendant in a class-action lawsuit alleging violations of the Robinson-Patman Act and Sherman Act regarding pricing and allowances. The company believes the suit is without merit and intends to defend vigorously.
- Accounting Changes: The company plans to adopt SFAS 123(R) regarding share-based payments on August 28, 2005, which will require recognizing compensation expense for stock options, impacting future net income.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 5% (quarterly) and 3% (year-to-date) decline in comparable store sales and the impact of the "average ticket" increase.
- Lease Accounting Adjustment: Review the $40.3 million non-cash charge related to the change in lease accounting policy and its impact on future rent expense recognition.
- Pay-on-Scan (POS) Arrangements: Assess the $140.7 million of off-balance-sheet inventory under POS arrangements and the associated vendor receivables ($57.3 million).
- Legal Exposure: Monitor the status of the "Coalition for a Level Playing Field" litigation and potential liability for damages or injunctions.
- Debt Structure: Confirm the impact of the new $300 million term loan and the reduction in commercial paper on future interest expense and liquidity.