AUTOZONE INC quarterly report, Q3 FY2013

Business context and reporting period

AutoZone, Inc. operates automotive parts stores and commercial sales programs, with additional online, ALLDATA software, and international businesses. This unaudited Form 10-Q covers the 12 weeks ended May 4, 2013 (third quarter) and, where noted, the 36 weeks ended that date, compared with the corresponding periods in 2012. The company reported 5,109 stores across the U.S., Puerto Rico, Mexico, and Brazil. Its fiscal fourth quarter has 17 weeks in 2013; results are seasonal and the company cautions that interim results are not necessarily indicative of full-year results.

Financial performance and position

For the 36 weeks, operating cash flow less capital expenditures was approximately $637.0m, before acquisitions and other investing activity. Cash and cash equivalents were $133.7m at May 4. Total debt was $4.001bn, compared with $3.768bn at August 25, 2012; stockholders’ deficit was $1.532bn. Current assets of $3.178bn were below current liabilities of $3.836bn. Accounts payable equaled 111.4% of gross inventory.

Material changes versus the comparable period

• Quarter sales growth reflected new stores, expanded commercial programs, and AutoAnything; domestic same-store sales declined 0.1%. For the 36 weeks, domestic same-store sales declined 0.5%.
• Management attributed improved gross margin mainly to lower acquisition costs; AutoAnything reduced margin by 39 basis points in the quarter and 22 basis points year to date. Lower incentive compensation and, in the quarter, gains on asset disposals helped reduce operating expenses as a share of sales.
• Quarter diluted EPS growth included an estimated $0.52 benefit from share repurchases since the comparable prior-year period; the year-to-date benefit was $0.99.
• Interest expense increased as average borrowings rose, partly offset by lower average borrowing rates. Thirty-six-week investing cash use rose to $374.1m, including $116.1m for AutoAnything; financing cash use was $492.8m, including $827.3m of share repurchases.

Outlook, commentary, risks and unusual items

• Management expects fiscal 2013 capital expenditures to increase 10%–15% versus fiscal 2012, primarily for new stores, existing-store and infrastructure improvements, and the AutoAnything acquisition. It expects to fund investment, working capital and repurchases mainly with internally generated cash and borrowing capacity. No earnings or sales guidance is provided.
• Management cited challenging consumer conditions, including pressure on customer cash flows, payroll-tax increases, fuel prices and weather. Miles driven had remained relatively flat year over year through March 2013; management viewed the aging vehicle fleet as supportive but could not predict its impact. It attributed a third-quarter slowdown in maintenance-category sales partly to prolonged winter weather.
• AutoZone acquired AutoAnything in December 2012 for up to $150m, including an initial $115m cash payment, a working-capital holdback and up to $30m of performance-based consideration. The acquisition added $83.4m of goodwill and $58.7m of intangible assets; management said it was intended to strengthen online automotive accessory and performance sales.
• Debt included $4.001bn outstanding; $951.1m was due within 12 months but classified as long-term based on the company’s stated ability and intent to refinance and $996.3m of available revolving capacity. After quarter-end, commercial paper was used to repay $200m of notes due June 2013. The company issued $500m of 3.125% notes due 2023 during the quarter. Adjusted debt/EBITDAR was 2.5x, unchanged year over year; the company reported covenant compliance.
• New Jersey regulators asserted potential liability for off-site groundwater impacts at a former service-station site; AutoZone contests the assertion and said costs could not yet be determined, but did not expect material financial impact. The filing also describes employment-related lawsuits, which management did not expect to be material.
• Management identified macroeconomic conditions, competition, demand, weather, energy and supplier costs, financing access, and other factors as risks to forward-looking statements. It reported no material changes to previously disclosed risk factors. The interim financial statements received an independent accountant’s review, not an audit.

Important facts for investors to verify

• Whether domestic same-store sales stabilize and whether growth from new stores and commercial programs offsets weak comparable sales.
• How AutoAnything performs against its targets, including contingent payments, and whether expected online growth justifies acquisition costs and added goodwill.
• Debt refinancing and liquidity: near-term maturities, commercial-paper reliance, revolving-credit availability, and the impact of higher interest rates.
• The pace and returns of planned capital spending, continued buybacks, and the effect of repurchases on per-share results.
• Future cash conversion and working-capital trends, particularly inventory, supplier payment terms, and accounts payable relative to inventory.
• Developments in the New Jersey remediation matter and employment litigation, where ultimate costs or outcomes are not certain.