AutoZone, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the 12 weeks ended November 22, 2014; comparisons are with the 12 weeks ended November 23, 2013. AutoZone operates automotive parts retail and distribution businesses, alongside ALLDATA and e-commerce operations. The quarter’s results are not necessarily indicative of the full fiscal year; sales are seasonal.
Financial performance
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2.260 billion | $2.094 billion | +8.0% |
| Gross profit / margin | $1.177 billion / 52.1% | $1.086 billion / 51.9% | Margin +0.2 percentage points |
| Operating expenses (SG&A) / sales | $768.1 million / 34.0% | $702.0 million / 33.5% | Expense ratio +0.5 points |
| Operating profit | $408.6 million | $383.7 million | +6.5% |
| Net income | $238.3 million | $218.1 million | +9.3% |
| Diluted EPS | $7.27 | $6.29 | +15.6% |
| Operating cash flow | $375.2 million | $357.3 million | +$17.9 million |
| Capital expenditures | $92.4 million | $82.6 million | +$9.8 million |
Gross-margin improvement reflected higher merchandise margins and lower shrink, partly offset by a 24-basis-point impact from IMC. SG&A as a share of sales rose mainly because of higher legal costs and self-insured medical costs. Net interest expense fell to $37.1 million from $42.4 million, largely due to lower borrowing rates; the weighted average borrowing rate was 3.4% versus 4.2%.
Liquidity, debt, and capital allocation
- Cash was $117.2 million at November 22, 2014. Total debt was $4.422 billion, including $972.1 million of commercial paper; $559.2 million was presented as short-term borrowings and $3.863 billion as long-term debt.
- AutoZone reported $1.213 billion available under its $1.25 billion revolving credit facility, which expires in September 2017. The company stated it had the ability and intent to refinance specified obligations on a long-term basis and was in compliance with debt covenants.
- Financing activities used $201.2 million, including $299.6 million to repurchase 571,106 shares. $569.6 million remained under the repurchase authorization at quarter-end.
- Investing activities used $180.8 million, including $75.7 million for the IMC acquisition and $10.0 million for intangible assets. Management expected fiscal 2015 investment to increase versus fiscal 2014.
- Trailing-four-quarter after-tax ROIC was 31.7%, down from 32.7%; adjusted debt to EBITDAR was 2.5x, unchanged from the comparable prior-year measure.
Material changes and management outlook
- Domestic same-store sales grew 4.5%. Management attributed sales growth to same-store performance, $38.9 million of sales from new stores, increased commercial programs, and IMC sales.
- Management said falling U.S. gasoline prices during the quarter—$3.46 to $2.82 per gallon—likely supported sales by increasing consumers’ discretionary spending capacity. Colder weather late in the quarter was also considered favorable to sales.
- AutoZone acquired IMC, a distributor of import replacement parts, effective September 27, 2014, for $75.7 million net of cash. IMC operated 17 branches. The preliminary purchase-price allocation included $16.1 million of goodwill and $8.3 million of intangible assets.
- Management planned increased investment in new stores, existing-store improvements, supply-chain infrastructure, technology, and IMC. It expected higher per-store capital spending to continue as the store-opening mix shifted toward ground leases and land purchases. No specific earnings or sales guidance was provided.
- Management described strategic tests involving hub inventory, store product availability, and distribution-center delivery frequency. It also cited long-term support from an aging vehicle fleet and expected low-single-digit annual miles-driven growth, while noting uncertainty about the impact on future results.
Risks, contingencies, and unusual items
- Risks cited include economic conditions, fuel prices, competition, product demand, weather, hiring and retention, supplier costs, financing access, and regulatory changes. Management cautioned that gas-price and weather effects are difficult to predict.
- Environmental remediation remains under way at a New Jersey site; the state has asserted potential liability for off-site impacts, which the company contests. Costs could not be determined, but management did not expect them to be material and believed it may qualify for reimbursement of up to 75% of eligible costs, subject to state clarification.
- The company received a California subpoena regarding hazardous-waste handling, storage, and disposal and said it was cooperating; the outcome was uncertain. Other employee-related lawsuits were not expected by management to result in material liabilities.
- Foreign-currency translation produced an $18.4 million quarterly other-comprehensive loss, reducing comprehensive income to $221.1 million despite higher net income.
- Variable-rate debt was $972.1 million; a one-percentage-point interest-rate increase was estimated to reduce annual pretax earnings and cash flow by $9.7 million. The filing reported no material change in risk factors from the prior annual report.
Important facts for investors to verify
- Whether same-store sales momentum, commercial-program growth, and the quarter’s favorable fuel-price and weather effects persist.
- IMC’s contribution to sales and profitability, and whether the preliminary acquisition valuation or expected synergies change.
- Near-term refinancing and repayment plans for senior notes due January and November 2015, commercial-paper funding, and continued revolver availability.
- Whether rising operating expenses and planned higher investment affect margins, cash generation, and ROIC.
- Developments in the New Jersey remediation matter, the California subpoena, and employee litigation.