AutoZone, Inc. — FY2019 Form 10-K
Business context and reporting period. AutoZone retails and distributes automotive replacement parts and accessories, with ALLDATA repair-information software and e-commerce businesses. It operated 6,411 stores across the U.S., Mexico and Brazil at August 31, 2019, including 4,893 domestic stores with commercial programs. The fiscal year ended August 31, 2019 and contained 53 weeks, versus 52 weeks in FY2018. The fourth quarter contained 17 weeks versus 16 weeks a year earlier; therefore, reported annual and quarterly growth includes an extra week. AutoZone does not provide automotive repair or installation services.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $11.864 billion | $11.221 billion |
| Gross profit / gross margin | $6.365 billion / 53.7% | $5.974 billion / 53.2% |
| Operating profit / operating margin | $2.216 billion / 18.7% | $1.811 billion / 16.1% |
| Net income | $1.617 billion | $1.338 billion |
| Diluted EPS | $63.43 | $48.77 |
| Cash from operations | $2.129 billion | $2.080 billion |
| Capital expenditures | $496.1 million | $521.8 million |
| Debt at year-end | $5.206 billion | $5.006 billion |
- Sales increased 5.7%. Management attributed growth to $410.5 million from new domestic stores, $238.6 million from the extra fiscal week and 3.0% domestic comparable-store sales growth, partly offset by prior-year business disposals. Domestic commercial sales rose 15.7%, including $51.3 million attributable to the extra week.
- Gross margin rose 41 basis points, primarily due to a 37-basis-point benefit from the prior-year sale of businesses. SG&A declined to 35.0% of sales from 37.1%, mainly because FY2018 included asset impairment and pension termination charges; higher domestic store payroll partly offset the improvement.
- Net income increased 20.9% and diluted EPS rose 30.1%. The 53rd week and share repurchases contributed to growth; management attributed $1.83 of FY2019 diluted EPS to repurchases.
- Domestic comparable-store sales increased 3.0%, versus 1.8% in FY2018. Failure and maintenance categories represented approximately 85% of sales. AutoZone reported 209 net new locations and ended the year with 35 domestic mega hubs.
Cash, debt and liquidity
- Operating cash flow was $2.129 billion; net cash used in investing was $491.8 million and net cash used in financing was $1.674 billion. Financing outflows included $2.005 billion of share repurchases.
- Cash and cash equivalents were $176.3 million. Current assets were $5.029 billion and current liabilities $5.512 billion, leaving a working-capital deficit of $483.5 million.
- Debt was $5.206 billion, including $1.030 billion of commercial paper classified as long-term because the company intended and had capacity to refinance it. AutoZone had $1.997 billion available under its $2.0 billion revolving facility and reported a 5.7:1 interest-coverage ratio against a 2.5:1 minimum. It said it was compliant with debt covenants.
- Adjusted debt to EBITDAR was 2.5x, unchanged from FY2018. The company issued $750 million of senior notes in FY2019: $300 million due 2024 at 3.125% and $450 million due 2029 at 3.750%.
- AutoZone repurchased 2.182 million shares for $2.005 billion during FY2019. After a subsequent authorization increase, $1.44 billion remained authorized as of the filing date. The company paid no common dividend.
Outlook, commentary and risks
- Management expected FY2020 investment to increase from FY2019 levels, primarily for new stores, supply-chain infrastructure, existing-location improvements and technology. No quantified earnings or sales guidance was provided.
- Management cited an aging vehicle fleet as supportive of long-term demand: the average vehicle age was 11.8 years as of January 1, 2019. U.S. miles driven rose 0.8% through July 2019 versus the comparable prior-year period. Wage pressure accelerated in FY2019, and management said future wage-related effects on earnings growth remained under assessment.
- Key risks include competition from online and physical retailers, pressure on prices and margins, changes in consumer demand, weather and fuel costs, labor availability and wage expense, supplier concentration and import/tariff exposure, international operations and currency movements, cybersecurity and IT disruption, and access to financing. One product class accounted for about 13% of sales and one vendor for about 12% of purchases.
- FY2018 included $193.2 million of asset impairment charges and $130.3 million of pension termination charges. The pension plans were terminated in FY2018; no remaining defined-benefit pension obligation was reported. FY2018 also benefited from a provisional $131.5 million Tax Reform benefit. FY2019’s effective tax rate was 20.4%, compared with 18.3% in FY2018; FY2019 included an $8.8 million Tax Reform adjustment benefit.
- For FY2019 Q4, the 17-week quarter reported sales of $3.988 billion, net income of $565.2 million and diluted EPS of $22.59. The comparable FY2018 quarter had 16 weeks, sales of $3.559 billion, net income of $400.3 million and diluted EPS of $15.02; FY2018 Q4 included the pension termination charge and Tax Reform effects.
- Legal matters: two California matters were resolved in FY2019 without a finding of liability, with payments within amounts previously accrued. The company disputed New Jersey environmental claims and said it did not expect material costs; other employment-related litigation was not believed likely to be material.
- The company expected to adopt lease accounting in FY2020 and estimated recognition of approximately $2.5–$2.8 billion of right-of-use assets and lease liabilities. This accounting change would increase reported balance-sheet amounts.
Important facts for investors to verify
- Separate underlying sales and earnings momentum from the benefit of FY2019’s extra week; compare comparable-store and commercial sales on consistent periods.
- Assess the sustainability of margin gains after removing FY2018 impairment and pension charges and considering wage, freight, tariff and competitive pricing pressures.
- Review debt maturities, refinancing capacity, interest-rate sensitivity and the company’s substantial lease commitments, including the forthcoming lease-accounting balance-sheet impact.
- Evaluate the pace and returns of store, mega-hub, supply-chain and technology investment alongside the company’s aggressive share-repurchase program.
- Monitor vendor dependence, inventory growth and payment terms, working-capital deficit, self-insurance estimates, and unresolved legal and tax exposures.