AutoZone, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Twelve weeks ended February 10, 2024; year-to-date (YTD) covers twenty-four weeks. Comparisons are with the periods ended February 11, 2023. AutoZone operates automotive parts stores in the U.S., Mexico and Brazil, alongside ALLDATA and e-commerce businesses. It reported 7,191 stores at quarter-end.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | YTD FY2024 | YTD FY2023 |
|---|---|---|---|---|
| Net sales | $3.86B | $3.69B | $8.05B | $7.68B |
| Gross profit | $2.08B | $1.93B | $4.29B | $3.92B |
| Gross margin | 53.9% | 52.3% | 53.3% | 51.1% |
| Operating profit | $743M | $670M | $1.59B | $1.39B |
| Net income | $515M | $477M | $1.11B | $1.02B |
| Diluted EPS | $28.89 | $24.64 | $61.48 | $52.12 |
| Net interest expense | $103M | $66M | $194M | $123M |
- Q2 sales grew 4.6%; constant-currency same-store sales increased 1.5% (domestic 0.3%, international 10.6%). YTD sales grew 4.9%; constant-currency same-store sales increased 1.8% (domestic 0.8%, international 10.7%). New stores contributed $62M to Q2 and $138M YTD sales growth. Domestic commercial sales rose 2.7% in Q2 and 4.2% YTD.
- Q2 operating profit increased 10.9% and net income 8.1%; diluted EPS rose 17.2%. YTD diluted EPS increased 18.0%. Share repurchases added an estimated $0.49 to Q2 EPS and $0.82 to YTD EPS versus the prior-year comparable periods.
- Operating, selling, general and administrative expenses were 34.6% of Q2 sales versus 34.1%; YTD, 33.6% versus 33.0%. Management attributed the increase primarily to domestic store payroll and technology investment.
- Operating cash flow was $1.26B YTD versus $1.15B. Capital expenditures were $491M versus $259M, and net cash used in investing was $544M versus $270M. Free cash flow was not reported as a company measure.
Balance sheet, debt and liquidity
- At February 10, 2024, cash was $304M; current assets were $7.16B and current liabilities $8.77B. Long-term debt was $8.63B, up from $7.67B at fiscal year-end. Stockholders’ deficit was $4.84B.
- Debt included $1.18B of commercial paper and $300M of senior notes due April 2024, classified as long-term because the company said it had the ability and intent to refinance them. Revolving-credit availability was $2.2B, before giving effect to commercial paper borrowings; there were no revolving borrowings. The company reported covenant compliance.
- YTD financing cash outflow was $693M, including $1.71B of treasury-stock purchases and $1.0B of debt issuance. YTD repurchases totaled approximately 663,000 shares for $1.7B; $2.1B remained authorized at quarter-end. The board added $2.0B of authorization in December 2023.
- Adjusted debt to EBITDAR, a non-GAAP measure, was 2.4x versus 2.3x a year earlier. Adjusted after-tax ROIC was 53.5% versus 54.7%.
- Supplier-finance-confirmed obligations were $4.8B included in accounts payable and $198M in other long-term liabilities. The company said supplier participation is optional and does not change its obligations or payment dates.
Management outlook, risks and notable items
- No specific sales or earnings guidance was provided. Management expects FY2024 investment in the business to increase from FY2023, primarily for new stores and supply-chain projects, including distribution centers, hubs and mega hubs. It expects to rely mainly on operating cash flow and borrowing capacity for investment, working capital and repurchases.
- Management cited inflation, fuel costs, wages, supply-chain disruption, hiring, weather, competition, financing conditions, product demand, cybersecurity and international-market execution among factors that could affect results. It noted that operating results to date are not necessarily indicative of full-year performance; the business is seasonal, and FY2024’s fourth quarter has 17 weeks.
- Gross-margin expansion benefited from non-cash LIFO adjustments: $24M in Q2 and $107M YTD, alongside merchandise-margin and supply-chain improvements. The LIFO credit reserve declined to $43M from $59M, primarily due to lower freight costs.
- Interest expense increased as average borrowings and weighted-average borrowing rates rose. YTD average borrowings were $8.4B at 4.31%, compared with $6.5B at 3.58% a year earlier.
- Legal matters were described as ordinary-course proceedings; management did not expect them, individually or collectively, to materially affect financial condition, results or cash flows. The filing reported no material changes to risk factors. The independent accountant’s interim review found no material modifications needed for GAAP conformity; this was a review, not an audit.
Important facts for investors to verify
- Whether same-store sales and margin performance can be sustained, particularly given the sharp year-over-year slowdown in constant-currency comparable sales growth.
- How much of the gross-margin improvement reflects non-cash LIFO benefit and whether those benefits persist.
- Debt refinancing plans, interest-rate exposure, and the effect of higher borrowing costs; a one-percentage-point increase in rates was estimated to reduce annual pretax earnings and cash flows by $11.8M on variable-rate debt.
- The sustainability of cash generation amid higher capital spending and large repurchases, and the company’s reliance on supplier payment terms and supplier-finance programs.
- Execution and returns from planned store and supply-chain investment, as well as developments in the macroeconomic, cybersecurity, legal and operational risks described in the filing.