AutoZone, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended May 9, 2020 (12 weeks), with year-to-date comparisons for the 36 weeks ended May 9, 2020. Fiscal 2020 ends August 29, 2020. AutoZone operates automotive-parts retail and distribution businesses in the U.S., Mexico and Brazil, with 6,484 stores at quarter-end.
Financial performance
| Metric | 12 weeks ended May 9, 2020 | 12 weeks ended May 4, 2019 | 36 weeks ended May 9, 2020 | 36 weeks ended May 4, 2019 |
|---|---|---|---|---|
| Net sales | $2.779 billion | $2.783 billion | $8.086 billion | $7.875 billion |
| Gross profit / margin | $1.491 billion / 53.6% | $1.492 billion / 53.6% | $4.358 billion / 53.9% | $4.235 billion / 53.8% |
| Operating profit | $491.7 million | $547.5 million | $1.400 billion | $1.435 billion |
| Net income | $342.9 million | $405.9 million | $992.5 million | $1.052 billion |
| Diluted EPS | $14.39 | $15.99 | $41.08 | $40.92 |
| Operating, selling, general and administrative expense | $999.0 million (35.9% of sales) | $944.5 million (33.9%) | $2.958 billion (36.6%) | $2.799 billion (35.5%) |
Cash flow, 36 weeks: Operating cash flow was $1.303 billion, versus $1.287 billion; capital expenditures were $273.9 million, versus $313.8 million. Investing cash outflow was $247.9 million and financing cash outflow was $712.2 million. Cash rose to $509.1 million from $176.3 million at August 31, 2019.
Debt and liquidity: Long-term debt was $5.418 billion at May 9, 2020, up from $5.206 billion at fiscal year-end. The company issued $1.25 billion of senior notes in March and had no borrowings under its revolving facilities; available capacity under the $2.75 billion revolving facilities was $2.747 billion. It also entered a separate $750 million 364-day facility. The company reported covenant compliance. Operating lease liabilities were $2.718 billion and finance lease liabilities $184.3 million. Shareholders’ deficit was $1.633 billion.
Changes and management commentary
- Quarterly sales declined 0.1%; domestic same-store sales decreased 1.0%, and domestic commercial sales fell 6.7% to $573.8 million. New stores contributed $55.4 million in sales. For the year-to-date period, sales rose 2.7%, domestic same-store sales increased 0.5%, and domestic commercial sales grew 4.5%.
- Quarterly operating profit fell 10.2%, net income fell 15.5%, and diluted EPS fell 10.0%. YTD net income declined 5.7%, while diluted EPS rose 0.4%, reflecting in part the effect of fewer shares following repurchases.
- COVID-19 initially pressured sales and led to shorter store hours, but sales recovered and operating hours were restored. The company remained unable to predict the pandemic’s ultimate effects. Approximately $75 million of COVID-related employee-benefit, protective-supply and other costs were included in operating expenses for both the quarter and year-to-date period.
- Management said fiscal 2020 investment in the business was expected to decrease compared with fiscal 2019 due to COVID-19. Capital investment priorities include stores, supply chain, technology and existing-store improvements. No specific earnings or sales guidance was provided.
- To conserve liquidity amid uncertainty, the company temporarily stopped share repurchases during the quarter and said it would consider resuming them as conditions warranted. It repurchased 826,002 shares for $930.9 million during the 36-week period; $795.9 million remained authorized.
- Adjusted after-tax ROIC, a non-GAAP measure, was 34.0% for the trailing four quarters, compared with 34.5%. Adjusted debt to EBITDAR was 2.6:1, versus 2.5:1.
Risks, contingencies and unusual items
COVID-19 could adversely affect demand, store traffic and hours, staffing, supply chains, liquidity and cash flows; the filing cites uncertainty around duration, severity and possible resurgence. Other disclosed risks include competition, financing and credit conditions, cybersecurity and IT disruptions, sourcing costs, weather and international-market challenges.
The company adopted lease accounting Topic 842 on September 1, 2019, recognizing operating lease assets and liabilities without restating prior periods; this affects balance-sheet comparability. It reported a $104.9 million quarterly foreign-currency translation loss and $12.8 million of fair-value losses on treasury-rate-lock hedges in other comprehensive income. Management did not expect pending employment-related lawsuits or the New Jersey environmental matter to result in material liabilities. The interim financial statements received an independent accountant’s review, not an audit.
Key investor verification points
- Track whether post-quarter sales and domestic commercial demand recovered or weakened, and how COVID-related costs and operating expenses affect margins.
- Review liquidity, debt maturities and refinancing plans, including the $750 million notes due November 2020, $250 million notes due April 2021, and the 364-day facility due April 2021.
- Assess the implications of substantial lease obligations and the change in lease accounting for comparisons with prior periods.
- Monitor capital spending, store openings and any restart of share repurchases, alongside leverage and covenant headroom.
- Check subsequent filings for developments in COVID-19 risks, litigation/environmental contingencies, and the effects of foreign exchange and interest-rate hedges.