AutoZone, Inc. — Q1 Fiscal 2021 Form 10-Q
Business context and reporting period. The filing covers the 12 weeks ended November 21, 2020, compared with the 12 weeks ended November 23, 2019. AutoZone operates automotive parts retail and distribution businesses, with 6,590 stores in the U.S., Mexico and Brazil as of quarter-end, as well as ALLDATA and e-commerce operations. The interim results are not necessarily indicative of the full fiscal year.
Financial performance and position
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $3.154 billion | $2.793 billion | +12.9% |
| Gross profit / margin | $1.676 billion / 53.1% | $1.501 billion / 53.7% | Margin down 0.6 percentage points |
| Operating profit | $615.2 million | $500.0 million | +23.0% |
| Net income | $442.4 million | $350.3 million | +26.3% |
| Diluted EPS | $18.61 | $14.30 | +30.1% |
| Operating cash flow | $683.5 million | $447.1 million | Up $236.4 million |
| Capital expenditures | $113.0 million | $101.4 million | Higher |
Operating, selling, general and administrative expenses were $1.060 billion, or 33.6% of sales, versus $1.001 billion, or 35.8%, a lower rate primarily reflecting sales leverage. Net interest expense rose to $46.2 million from $43.7 million. The effective tax rate declined to 22.2% from 23.2%, principally due to a larger tax benefit from exercised stock options.
Cash and cash equivalents were $1.664 billion at November 21, 2020. Long-term debt, net of discounts and issuance costs, was $5.515 billion; the company also reported $2.770 billion of operating lease liabilities. It had no borrowings under its revolving facilities and reported $2.748 billion of availability under its $2.750 billion revolving credit agreements. Current assets exceeded current liabilities by approximately $380 million. Stockholders’ deficit was $1.027 billion.
Material changes versus the prior comparable period
- Domestic same-store sales increased 12.3%; domestic commercial sales rose 11.9% to $695.3 million. Management attributed overall sales growth to strong demand, including pandemic-related effects, and sales from new stores.
- Gross margin declined from 53.7% to 53.1%, primarily due to one-time COVID-19-related charges, increased loyalty-program participation, and sales mix.
- Operating cash flow increased, reflecting higher net income and the timing of accrued payments. Financing cash outflow also increased, mainly with share repurchases of $678.3 million versus $450.0 million a year earlier.
- The company opened 41 net new stores, compared with 22 in the prior-year quarter. Diluted weighted-average shares fell to 23.778 million from 24.493 million; management said repurchases since the prior-year period added $0.48 to current-quarter diluted EPS.
Outlook, commentary and risks
Management provided no specific earnings or sales guidance. It expects fiscal 2021 investment in the business to exceed fiscal 2020, primarily for new stores, supply-chain infrastructure, technology and store improvements. It expects to rely mainly on internally generated funds and available borrowing capacity for capital expenditures, working capital and repurchases, with possible additional borrowing.
Management said sales remained elevated versus pre-pandemic levels but growth decelerated during the quarter as pandemic-related stimulus effects waned and normal seasonality approached. The longer-term effects of COVID-19 remain uncertain; potential impacts include demand, store hours, workforce availability, supply chains and liquidity. U.S. miles driven declined 8.6% from the start of the fiscal year through September 2020, the latest data cited. Management also noted that the aging vehicle fleet is favorable to the industry.
A December 2020 employee time-off benefit enhancement is expected to result in approximately $50 million of expense in Q2 FY2021. On December 15, the board increased the cumulative share-repurchase authorization by $1.5 billion; after subsequent repurchases, $1.508 billion remained authorized. The company was in compliance with debt covenants. Management did not expect the disclosed employee wage-and-hour and termination lawsuits, individually or collectively, to create material liabilities. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether elevated demand and the 12.3% domestic same-store sales growth persist as stimulus effects and pandemic conditions change.
- Whether margin pressure from pandemic-related costs, loyalty participation and mix abates, and how the approximately $50 million Q2 employee benefit expense affects results.
- The pace and funding of planned fiscal 2021 investment, inventory and vendor payment terms, and continued access to revolving credit capacity.
- The amount and timing of future share repurchases and their effect on EPS, cash and leverage.
- COVID-19, supply-chain, consumer-demand, miles-driven, credit-rating and litigation risks. The interim financial statements were reviewed by the independent auditor, not audited.