Business Context and Reporting Period
Company: AutoZone, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 10, 2007 (Twelve and Twenty-Four Weeks)
Business Overview: Leading retailer and distributor of automotive replacement parts and accessories in the U.S. As of February 10, 2007, the company operated 3,955 stores (including 108 in Mexico). The business is seasonal, with lower sales typically occurring in winter months.
Key Financial Metrics
| Metric (in thousands) | 12 Weeks Ended Feb 10, 2007 | 24 Weeks Ended Feb 10, 2007 |
|---|---|---|
| Net Sales | $1,300,357 | $2,693,426 |
| Gross Profit | $639,212 | $1,324,508 |
| Gross Margin | 49.2% | 49.2% |
| Operating Profit | $188,923 | $411,919 |
| Net Income | $103,016 | $226,905 |
| Diluted EPS | $1.45 | $3.17 |
| Cash from Operations (24 wks) | $280,461 | |
| Long-Term Debt | $1,854,304 | |
| Cash & Equivalents | $86,062 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.7% for the quarter and 3.9% for the year-to-date period compared to the prior year, primarily driven by new store openings. Domestic comparable store sales were flat.
- Profitability: Net income increased 6.2% for the quarter and 7.3% year-to-date. Diluted EPS grew 15.5% and 16.0% respectively, significantly aided by share repurchases.
- Expense Management: Operating expenses as a percentage of sales decreased (34.6% vs 34.9% for the quarter; 33.9% vs 34.3% year-to-date) due to store reset efforts and expenditure reductions.
- Interest Expense: Increased due to higher average borrowing levels and rates (weighted average rate 5.7% vs 5.5% prior year) and the recognition of interest on capital lease obligations.
- Store Count: Increased from 3,743 to 3,955 stores, including 76 new domestic stores and 8 in Mexico during the 24-week period.
Guidance, Outlook, and Risks
- Capital Allocation: The company continues an aggressive stock repurchase program. As of February 10, 2007, $219.7 million was spent on repurchases in the 24-week period. The Board authorized an increase in the repurchase limit from $4.9 billion to $5.4 billion on February 26, 2007.
- Liquidity: Primary liquidity source is operating cash flow. The company maintains $1.0 billion in revolving credit facilities with $818.9 million available capacity. Credit ratings remain stable (S&P BBB+, Moody's Baa2).
- Seasonality: Management notes that results for the first half of the fiscal year are not indicative of full-year results due to seasonality, with peak sales occurring in summer months.
- Risks: Key risks include competition, consumer debt levels, inflation, raw material costs, energy prices, and weather events. The company utilizes fuel swaps to hedge diesel and unleaded fuel exposure.
- Off-Balance Sheet: Significant use of Pay-on-Scan (POS) arrangements ($50.5 million merchandise value) where title remains with vendors until sale. Commercial receivables sold to third parties with limited recourse ($56.0 million outstanding).
Investor Verification Checklist
- Share Count Impact: Verify the impact of the $219.7 million stock buyback on diluted EPS growth versus organic earnings growth.
- Comparable Store Sales: Confirm the "flat" domestic comparable store sales figure given the overall revenue growth driven by new stores.
- Debt Servicing: Review the increase in interest expense relative to the weighted average borrowing rate increase to 5.7%.
- Inventory Valuation: Note the LIFO reserve of $213.3 million and the potential impact of price inflation on future cost of sales.
- Capital Lease Obligations: Assess the $25.7 million in capital lease obligations resulting from modified vehicle leasing arrangements.