AutoZone, Inc. — FY2017 Form 10-K
Business context and reporting period. AutoZone operates automotive-parts retail and distribution businesses, including commercial sales, e-commerce, ALLDATA and IMC. At August 26, 2017, it had 6,003 AutoZone stores and 26 IMC branches across the U.S., Puerto Rico, Mexico and Brazil. Fiscal 2017 was the 52 weeks ended August 26, 2017; the fourth quarter covered 16 weeks. The filing reports annual results and unaudited quarterly results.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $10.889 billion | $10.636 billion |
| Gross profit / margin | $5.740 billion / 52.7% | $5.609 billion / 52.7% |
| Operating profit | $2.080 billion | $2.060 billion |
| Net income | $1.281 billion | $1.241 billion |
| Diluted EPS | $44.07; adjusted $43.26 | $40.70 |
| Net cash from operations | $1.571 billion | $1.641 billion |
| Capital expenditures | $554 million | $489 million |
| Debt at year-end | $5.081 billion | $4.924 billion |
| Cash at year-end | $293 million | $190 million |
| Working capital | $(155) million | $(451) million |
FY2017 operating margin was approximately 19.1% and net margin approximately 11.8%. The company reported a current ratio below 1, with negative working capital; it cited supplier payment terms and inventory purchasing practices as part of its working-capital model. Its $2.0 billion revolving facilities had $1.997 billion available, with no borrowings outstanding and $3.3 million of letters of credit under the multi-year facility. Interest coverage was 6.0:1 versus a 2.5:1 minimum covenant; adjusted debt to EBITDAR was 2.6x.
For the 16-week fourth quarter, sales were $3.513 billion versus $3.399 billion, net income was $433.9 million versus $426.8 million, and diluted EPS was $15.27 versus $14.30. The fourth quarter represented 32.3% of annual sales and 33.9% of annual net income.
Material changes versus the prior comparable period
- Annual sales increased 2.4%; domestic comparable-store sales increased 0.5%, down from 2.4% in FY2016. New domestic stores contributed $172.5 million in sales.
- Domestic commercial sales rose 5.7%, or $110.9 million. Failure and maintenance categories together accounted for approximately 84% of sales.
- Gross margin was essentially flat at 52.7%; higher supply-chain costs associated with inventory initiatives were partly offset by higher merchandise margins. SG&A rose to 33.6% of sales from 33.4%, reflecting occupancy-cost deleverage and wage pressure.
- Net income rose 3.2% and diluted EPS rose 8.3%. Adoption of share-based-payment accounting guidance added a net $0.81 to FY2017 diluted EPS; adjusted diluted EPS growth excluding that benefit was 6.3%. Repurchases contributed an estimated $1.03 to diluted EPS.
- Operating cash flow declined $70 million, primarily from timing of accounts payable and accrued expenses, partly offset by higher earnings and lower pension contributions. Capital spending rose, principally for distribution centers and existing locations.
- Debt increased approximately $157 million. AutoZone issued $600 million of 3.75% senior notes due 2027; proceeds were used for general corporate purposes.
Outlook, management commentary, risks and unusual items
- Management expected FY2018 investment spending to decrease from FY2017, which included significant distribution-center construction. Planned investment areas included new stores, supply-chain infrastructure, existing locations and technology. No specific earnings or sales guidance was provided.
- Management said it would continue testing delivery-frequency approaches and expected to conclude the revised test in FY2018. At year-end, 16 mega hubs served a network of more than 4,000 stores, while delivery-frequency tests covered roughly 2,300 stores.
- Management highlighted wage inflation and regulatory wage increases as potential pressure on earnings growth. Other demand factors include fuel costs, weather, miles driven, the aging vehicle fleet and economic conditions. U.S. miles driven rose 1.2% through June 2017; average vehicle age was 11.7 years.
- Key risks include intense competition, including online and multi-channel sellers; weak comparable-store sales; labor costs and employee retention; supplier, import and supply-chain disruption; cyber and information-system incidents; foreign exchange exposure; and access to credit or higher borrowing costs.
- Subsequent to year-end, storms caused damage and flooding in Texas, Florida, Louisiana and Puerto Rico. Damage in the mainland states was not material; the Puerto Rico assessment was incomplete, and the potential loss was uncertain.
- Environmental and other legal matters included New Jersey groundwater remediation and claims, a California hazardous-waste investigation, alleged emissions-parts violations, and employment-related lawsuits. The company did not expect material effects from these matters, but outcomes were uncertain.
- Management reported no goodwill impairment in FY2017, while warning that further weakness in AutoAnything or IMC profitability could lead to an impairment test and possible impairment. Internal control over financial reporting was assessed as effective; the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether comparable-store sales and commercial growth improve, and how much FY2017 EPS growth depended on tax-accounting benefits and share repurchases.
- Whether inventory and delivery initiatives improve product availability enough to justify their supply-chain costs, inventory growth and lower inventory turns.
- Debt maturity and refinancing exposure, interest-rate sensitivity, and continued compliance with credit-facility covenants.
- Progress on wage and occupancy-cost pressures, and whether planned lower FY2018 capital spending supports returns on invested capital.
- The eventual Puerto Rico storm-loss assessment and developments in the disclosed legal and environmental matters.
- The expected balance-sheet effect of the new lease-accounting standard, which management said would materially increase reported assets and liabilities but had not yet quantified.