AutoZone, Inc. — Fiscal 2022 Q2 Form 10-Q
Business context and reporting period. AutoZone operates automotive parts and accessories stores and related commercial, software and e-commerce businesses. The quarter was the 12 weeks ended February 12, 2022; year-to-date figures cover 24 weeks. At quarter-end, the company operated 6,815 stores in the U.S., Mexico and Brazil. Figures below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | 12 weeks ended Feb. 12, 2022 | 12 weeks ended Feb. 13, 2021 | 24 weeks ended Feb. 12, 2022 | 24 weeks ended Feb. 13, 2021 |
|---|---|---|---|---|
| Net sales | $3,369.8 | $2,910.8 | $7,038.7 | $6,065.1 |
| Gross profit | $1,785.2 | $1,559.4 | $3,710.4 | $3,235.0 |
| Gross margin | 53.0% | 53.6% | 52.7% | 53.3% |
| Operating profit | $626.8 | $481.8 | $1,381.2 | $1,097.0 |
| Net income | $471.8 | $345.9 | $1,027.0 | $788.4 |
| Diluted EPS | $22.30 | $14.93 | $48.03 | $33.59 |
- Quarterly sales rose 15.8%; domestic same-store sales increased 13.8%, domestic commercial sales rose 32.1%, and new stores contributed $64.9 million of sales. Commercial represented approximately 25% of total sales.
- Quarterly operating profit increased 30.1% and net income rose 36.4%. Diluted EPS grew 49.4%, including a disclosed $1.89 per-share benefit from share repurchases since the prior-year comparable period.
- Quarterly operating expenses were 34.4% of sales versus 37.0% a year earlier. Lower expense ratios reflected sales leverage and approximately $40 million of prior-year pandemic-related costs, including emergency time off. Gross margin declined mainly due to initiatives to accelerate commercial growth.
- Quarterly net interest expense was $42.5 million versus $46.0 million; the effective tax rate was 19.3% versus 20.6%, with the lower rate primarily reflecting greater tax benefits from exercised stock options.
Cash flow, liquidity and capital
- For the 24-week period, operating cash flow was $1,139.7 million, compared with $1,039.8 million. Inventory increases used $393.5 million of cash; management attributed the increase in cash flow primarily to higher net income, partly offset by inventory and other working-capital changes.
- Investing cash outflow was $211.3 million, including $208.1 million of capital expenditures. The company opened 48 net new stores, compared with 76 in the prior-year period.
- Financing cash outflow was $1,859.9 million, including $2,460.0 million of treasury-stock purchases. The company repurchased 1.3 million shares during the 24 weeks. Cash declined from $1,171.3 million at fiscal year-end to $239.4 million at February 12.
- Long-term debt carrying value was $5,840.9 million, including $1,068.1 million of commercial paper; it was $5,269.8 million at August 28, 2021. The company also repaid $500 million of notes due April 2022. Cash plus undrawn revolver availability was reported as $239.4 million and $2.2 billion, respectively; the latter figure is before giving effect to commercial-paper borrowings.
- The amended revolving credit facility has $2.25 billion of capacity, matures in November 2026, and had no borrowings at quarter-end. The company said it was covenant-compliant and intended to refinance commercial paper and $300 million of notes due January 2023 using available facility capacity.
- Adjusted debt to EBITDAR, a company-defined non-GAAP measure, was 2.0x versus 2.3x a year earlier. Stockholders’ deficit was $3,137.5 million, reflecting the company’s substantial repurchases and accounting for retirement of previously repurchased shares.
Changes, outlook and risks
- Management said sales remained at all-time high volumes during the pandemic and identified strong sales growth and expense leverage as drivers of earnings. Failure- and maintenance-related categories were approximately 84% of sales, with no fundamental change in sales mix.
- Management expects fiscal 2022 investment in the business to exceed fiscal 2021, primarily for store-base and supply-chain expansion, including new stores, mega hubs, distribution-center expansion and remodels. The filing provides no specific sales, earnings or EPS guidance and cautions that interim results are not necessarily indicative of full-year results.
- Management cited inflation, fuel costs, wages, supply-chain disruptions, product availability, hiring, macroeconomic conditions and the continuing effects of COVID-19 as factors that may affect results; it said the duration and impact of current trends cannot be predicted. Other disclosed risks include demand changes, financing access, credit downgrades, cyber and IT disruptions, weather, competition and international-market challenges.
- Legal proceedings include employee wage-and-hour and termination lawsuits. Management did not believe these matters, individually or in aggregate, would result in material liabilities. No material changes to previously reported risk factors were identified.
- The board authorized an additional $1.5 billion of repurchases in December 2021; $957.6 million remained under authorization at February 12. Through March 11, the company repurchased a further 119,542 shares for $226.9 million. The interim financial statements received an independent accountant’s review, not an audit.
Key facts for investors to verify
- Whether strong same-store and commercial sales growth persists, and how commercial growth initiatives affect gross margin.
- Inventory growth, supplier payment terms and the sustainability of the high accounts-payable-to-inventory ratio (126.8% at quarter-end).
- Cash levels, commercial-paper refinancing, revolving-facility availability and sensitivity to interest rates; the company reported $1.1 billion of variable-rate debt and estimated a one-percentage-point rate increase would reduce annual pretax earnings and cash flows by $10.7 million.
- The pace and funding of share repurchases relative to debt, liquidity and planned investment in stores and supply chain.
- Developments in employee litigation and the potential operational or financial effects of inflation, supply constraints, hiring challenges and COVID-19.