Business context and reporting period
AutoZone, Inc. filed this Form 10-K for the fiscal year ended August 29, 2015 (52 weeks), with fourth-quarter results for the 16 weeks ended that date. The company retails and distributes automotive parts and accessories, and sells diagnostic software and online products; it does not provide vehicle repair or installation services. At year-end it operated 5,589 AutoZone stores and 20 IMC branches across the United States, Puerto Rico, Mexico, and Brazil.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net sales | $10.187 billion | $9.475 billion |
| Gross profit / margin | $5.327 billion / 52.3% | $4.935 billion / 52.1% |
| Operating profit | $1.953 billion | $1.830 billion |
| Net income | $1.160 billion | $1.070 billion |
| Diluted EPS | $36.03 | $31.57 |
| Cash from operations | $1.525 billion | $1.341 billion |
| Capital expenditures | $480.6 million | $438.1 million |
| Debt, carrying value | $4.625 billion | $4.323 billion |
Fourth-quarter sales were $3.290 billion, net income was $401.1 million, and diluted EPS was $12.75, versus $3.050 billion, $373.7 million, and $11.28, respectively, in fiscal 2014’s 16-week fourth quarter. Year-end cash and cash equivalents were $175.3 million; working capital was negative $742.6 million. The company reported a stockholders’ deficit of $1.701 billion. It paid no common-stock dividend.
Material changes versus the prior comparable period
- Fiscal 2015 sales increased 7.5%, net income increased 8.5%, and diluted EPS increased 14.1%. Domestic comparable-store sales rose 3.8%, compared with 2.8% in fiscal 2014.
- Gross margin improved 0.2 percentage points, while operating expenses rose from 32.8% to 33.1% of sales, primarily reflecting higher legal costs and the IMC acquisition.
- Interest expense fell to $150.4 million from $167.5 million, as lower borrowing rates more than offset higher average borrowings. Average borrowing rates declined to 3.0% from 3.6%.
- Cash from operations increased, while investing cash outflow rose to $567.9 million, including $75.7 million for IMC. The company repurchased $1.271 billion of shares, up from $1.099 billion.
- Debt increased to $4.625 billion from $4.323 billion. After-tax return on invested capital declined to 31.2% from 32.1%; management attributed the decrease partly to higher average debt and investments whose returns were still developing.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2016 investment to increase, primarily for new locations, supply-chain infrastructure, existing-store improvements, and technology. It planned to expand tests of more frequent deliveries and larger-assortment “mega hub” stores. No specific sales or EPS guidance is provided in the filing.
- Management cited lower average U.S. gasoline prices in fiscal 2015 as supportive of customers’ discretionary spending, and increased miles driven and favorable regional weather as factors supporting failure-parts sales. These trends and their future effects are uncertain.
- Key risks include competition and pricing pressure, economic and vehicle-maintenance demand, weather and fuel costs, employee hiring and wage costs, supplier availability, execution of store and supply-chain expansion, cybersecurity and IT disruption, and access to credit. Foreign exchange is also material: the Mexican peso weakened about 29% against the U.S. dollar during fiscal 2015, contributing to a $113.7 million foreign-currency translation loss in other comprehensive income.
- AutoZone acquired IMC in September 2014 for $75.7 million net of cash; its results are included from the acquisition date. Fiscal 2015 included issuance of $650 million in notes, including $400 million of 3.25% notes due 2025 and $250 million of 2.50% notes due 2021.
- The company disclosed an environmental matter in New Jersey, including a state demand for about $296,000, which it contests; it did not expect remediation obligations to be material. It is cooperating with a California hazardous-waste subpoena and faces employee wage-and-hour and termination lawsuits; management did not expect these matters to be material, but the subpoena outcome was uncertain.
- Management reported effective internal control over financial reporting; the independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether comparable-store sales and commercial-market growth continue, and how much reported growth reflects new stores and IMC rather than underlying demand.
- Whether supply-chain and mega-hub investments improve product availability and margins, given the fiscal-year decline in inventory turnover to 1.4x from 1.5x.
- Debt refinancing and liquidity: $1.048 billion of commercial paper and certain near-term notes were classified as long-term based on refinancing capacity; confirm facility availability, maturities, and covenant compliance.
- Capital allocation and leverage: assess ongoing share repurchases against debt growth, negative working capital, and the $837.9 million of repurchase authorization remaining after the post-year-end increase and purchases described in the filing.
- Exposure to the Mexican peso and the status and potential costs of the environmental, hazardous-waste, and employment-related legal matters.