AZO

Business Context and Reporting Period

Company: AutoZone, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended August 30, 2008 (53 weeks)
Business Overview: AutoZone is the nation's leading specialty retailer and distributor of automotive replacement parts and accessories. As of August 30, 2008, the company operated 4,240 stores (4,092 domestic and 148 in Mexico). The company serves both Do-It-Yourself (DIY) retail customers and commercial (Do-It-For-Me) customers, including repair garages and dealers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.7% to $6.52 billion, driven by the addition of 159 net new domestic stores, a 1.9% increase from the 53rd week in the fiscal year, and a 0.4% increase in domestic same-store sales.
• Profitability: Net income rose 7.7% to $641.6 million. Diluted EPS increased 17.8% to $10.04, aided by significant share repurchases which reduced the share count.
• Expense Management: Operating expenses increased to 32.9% of sales (from 32.6%) primarily due to higher employee medical expenses and fuel costs for the commercial fleet. Gross margin improved to 50.1% due to category management efforts, partially offset by higher distribution costs.
• Capital Structure: Total debt increased by approximately $314 million to $2.25 billion. The company issued $750 million in new senior notes in August 2008 to repay maturing debt and commercial paper.
• Share Repurchases: The company repurchased 6.8 million shares for $849.2 million during fiscal 2008, significantly reducing stockholders' equity.

Guidance, Outlook, and Risks

Management Commentary: Management reported record earnings and solid growth in commercial sales. However, they noted that the challenging macro environment, including rising gas prices, the credit crisis, and higher unemployment, has impacted customer behavior. Miles driven declined for the ninth consecutive month as of July 2008. Management remains focused on offering value propositions related to vehicle maintenance and fuel efficiency.

Outlook: The company expects to invest in new store development and system enhancements consistent with historical rates in fiscal 2009. They anticipate relying on internally generated funds and available borrowing capacity to support capital expenditures and stock repurchases.

Risks and Contingencies:

• Macroeconomic Factors: Deteriorating global credit markets and recessionary conditions could limit access to short-term debt and increase borrowing costs. Rising energy prices may cause customers to defer maintenance purchases.
• Competition: The industry is highly competitive; competitors may have greater financial resources or more effective strategies.
• Legal Proceedings: AutoZone is a defendant in a Robinson-Patman Act lawsuit filed by over 200 plaintiffs alleging discriminatory pricing. The company believes the suit is without merit and is vigorously defending it.
• Vendor Consolidation: Further consolidation among vendors could limit purchasing options and increase merchandise costs.

Investor Verification Checklist

• 53rd Week Impact: Verify the impact of the 53-week fiscal year on year-over-year comparisons; excluding the extra week, net income increased 5.1% and EPS increased 14.9%.
• Debt Covenants: Confirm compliance with debt covenants, specifically the agreement with ESL Investments to increase the adjusted debt/EBITDAR target ratio to 2.5:1 by February 14, 2009.
• Same-Store Sales Trend: Monitor the 0.4% domestic same-store sales growth against the backdrop of declining vehicle miles driven and high fuel prices.
• Share Repurchase Program: Note the remaining authorization of approximately $109 million under the plan as of August 30, 2008 (increased to $6.9 billion total authorization in September 2008).
• Legal Exposure: Track the status of the Robinson-Patman Act litigation, as plaintiffs seek unspecified damages and an injunction against opening new stores.