AutoZone, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Twelve weeks ended November 17, 2018, compared with the twelve weeks ended November 18, 2017. AutoZone operates automotive parts and accessories stores, commercial sales programs, e-commerce businesses, and ALLDATA software. It reported 6,218 stores across the United States, Puerto Rico, Mexico, and Brazil. Results for this seasonal quarter are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 FY2019 | Prior period | Change |
|---|---|---|---|
| Net sales | $2,641.7 million | $2,589.1 million | +2.0% |
| Gross profit / margin | $1,417.5 million / 53.7% | $1,365.8 million / 52.8% | Margin +0.9 percentage points |
| Operating profit | $487.8 million | $468.8 million | +4.1% |
| Net income | $351.4 million | $281.0 million | +25.1% |
| Diluted EPS | $13.47 | $10.00 | +34.7% |
| Operating cash flow | $449.2 million | $565.0 million | −20.5% |
| Capital expenditures | $98.2 million | $110.3 million | Lower by $12.1 million |
Gross margin improvement reflected the prior-year sale of two businesses (65 basis points) and higher merchandise margins. SG&A increased to $929.7 million, or 35.2% of sales, from $897.1 million, or 34.6%; management cited expense deleverage, primarily domestic store payroll. Net interest expense was nearly flat at $39.0 million.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $252.1 million at quarter-end. Current assets were $4.814 billion versus current liabilities of $5.168 billion.
- Long-term debt carrying value was $5.156 billion, including $1.475 billion of commercial paper. Commercial paper and $250 million of notes due April 2019 were classified as long-term because the company said it had the ability and intent to refinance them.
- AutoZone had $1.997 billion available under its $2.0 billion revolving credit facility and reported compliance with debt covenants. Adjusted debt to EBITDAR was 2.5x, unchanged from the prior comparable period.
- Operating cash flow fell primarily due to timing of accrued payments. Inventory used $167.5 million of cash; financing included $149.4 million net commercial paper proceeds and $497.1 million of share repurchases.
- The board increased repurchase authorization by $1.25 billion; $984.6 million remained at November 17. AutoZone repurchased 654,070 shares during the quarter and reported additional repurchases of 97,113 shares for $79.8 million afterward.
Changes, outlook, and risks
- Domestic same-store sales rose 2.7%; domestic commercial sales increased 11.3%, or $55.7 million. Management attributed overall sales growth to new domestic stores and commercial sales, partly offset by the prior-year sale of two businesses. The company opened 16 net new stores.
- EPS growth benefited from the lower effective tax rate: 21.7%, compared with 34.6% a year earlier, primarily reflecting the federal tax-rate reduction under Tax Reform and tax benefits associated with option exercises. Share repurchases added $0.73 to diluted EPS, according to management.
- No specific full-year sales or earnings guidance is provided in the filing. Management expects FY2019 investment to exceed FY2018, focused mainly on new stores, supply-chain infrastructure, existing-store enhancements, and technology. It expects to use internally generated funds and available borrowing capacity for capital needs and repurchases.
- Management noted that the average age of the U.S. vehicle fleet remained above 11 years, while miles driven were essentially flat through September 2018. It cautioned that fuel costs, weather, competition, financing conditions, consumer conditions, labor, cyber risks, regulation, and supplier costs may affect results.
- Adoption of revenue-recognition guidance had no material overall effect, but reduced opening retained earnings by $6.8 million. The company expects lease-accounting adoption in FY2020 to significantly increase lease-related assets and liabilities; the impact on income is still being evaluated.
- Environmental matters and employment-related lawsuits are disclosed. The company said it had accrued probable and reasonably estimable amounts and did not expect the cited proceedings to materially affect its financial position, results, or cash flows; outcomes remain uncertain.
Important facts for investors to verify
- How much of sales and EPS growth is sustainable apart from Tax Reform, share repurchases, and the prior-year business sales?
- Whether SG&A growth and store payroll deleverage persist, and whether gross-margin gains continue.
- The drivers of lower operating cash flow, inventory investment, and the company’s reliance on extended supplier payment terms.
- Refinancing plans for commercial paper and the April 2019 notes, alongside variable-rate exposure and debt covenants.
- The eventual balance-sheet and income-statement effects of lease-accounting adoption, and developments in environmental and employment litigation.
The interim financial statements were reviewed by Ernst & Young LLP; the review was substantially narrower in scope than an audit.