AutoZone, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first 24 weeks of fiscal 2016, ended February 13, 2016. Comparisons are with the periods ended February 14, 2015. AutoZone operates automotive parts retail and distribution locations, plus ALLDATA and online businesses; it does not provide repair or installation services.
Financial performance
| Metric | 12 weeks | 24 weeks |
|---|---|---|
| Net sales | $2.257 billion, up 5.3% | $4.643 billion, up 5.4% |
| Gross profit / margin | $1.191 billion / 52.7%, versus 52.2% | $2.444 billion / 52.6%, versus 52.2% |
| Operating profit | $382.7 million | $820.7 million |
| Net income | $228.6 million, up 8.0% | $486.7 million, up 8.2% |
| Diluted EPS | $7.43, up 14.2% | $15.72, up 14.1% |
| Operating, selling, general and administrative expense | 35.8% of sales, versus 35.4% | 35.0% of sales, versus 34.7% |
| Net interest expense | $32.8 million, versus $34.5 million | $67.8 million, versus $71.6 million |
For the quarter, domestic same-store sales increased 3.6%; new stores contributed $37.0 million in sales. For the first 24 weeks, the company opened 67 net new locations. Higher merchandise margins improved gross margin, partly offset by supply-chain costs from inventory initiatives. SG&A as a share of sales rose, reflecting higher domestic store payroll and the prior-year benefit of a credit-card litigation settlement.
Cash flow, debt and liquidity
- First-half operating cash flow was $530.6 million, up from $476.5 million. Investing cash outflow was $200.6 million; capital expenditures were $186.6 million. Financing cash outflow was $288.3 million, including $550.1 million of share repurchases.
- Cash was $208.0 million at period-end. Total debt was $4.866 billion, including $1.566 billion of commercial paper; balance-sheet long-term debt was $4.388 billion and short-term borrowings were $457.4 million.
- The company reported $1.709 billion available under its $1.750 billion revolving credit facilities and no outstanding borrowings under those facilities. It stated it had the ability and intent to refinance certain commercial paper and 2016 notes on a long-term basis.
- Adjusted debt to EBITDAR was 2.5x, unchanged from the comparable prior-year measure. The company said it was in compliance with debt covenants. A one-percentage-point increase in rates on variable-rate debt would have an estimated $15.7 million annual pretax earnings and cash-flow impact.
- Stockholders’ deficit was $1.741 billion. The company repurchased 733,721 shares for $550.1 million in the first half and authorized a further $750 million increase in its buyback program on March 22, 2016.
Outlook, commentary and risks
- Management expected fiscal 2016 investment to increase versus fiscal 2015, primarily for new locations, supply-chain infrastructure, existing-location improvements and technology. The filing gives no quantified full-year sales or earnings guidance.
- Management continued expanding more frequent store deliveries and its “mega hub” strategy to increase inventory availability. It cited lower fuel prices, vehicle-fleet age, miles driven, tax-refund timing and weather as factors that can affect demand; future effects are uncertain.
- The business is seasonal, with sales generally strongest from February through September. Management cautioned that interim results are not necessarily indicative of full-year results.
- ROIC was 31.0%, down from 31.3%, which management attributed mainly to higher average debt and recent investments that were diluting returns.
- Legal matters include a California hazardous-waste investigation and employment-related lawsuits; management said outcomes are uncertain for the California inquiry and did not expect the other matters to be material. A New Jersey environmental remediation dispute and state lien are also described; management did not expect resulting costs to be material.
- Foreign-currency translation reduced other comprehensive income by $59.9 million year to date. The company also noted risks including consumer demand, competition, weather, energy costs, financing access, cyber threats and regulatory changes.
Most important facts for investors to verify
- Whether sales and same-store-sales growth persist after the seasonal quarter and delayed tax-refund timing.
- Whether inventory expansion and supply-chain initiatives improve availability without eroding margins or cash conversion.
- Debt refinancing capacity, commercial-paper exposure, interest-rate sensitivity and continued covenant compliance.
- The pace and funding of planned capital investment and share repurchases, given the stockholders’ deficit and leverage.
- Developments in the California, New Jersey and employment-related legal matters, and any resulting financial exposure.
The interim financial statements were reviewed by the independent registered public accounting firm; the review was substantially narrower in scope than an audit.