AutoZone, Inc. — Fiscal 2016 Form 10-K
Reporting period: Fiscal year ended August 27, 2016 (52 weeks). The fourth quarter was 16 weeks; fiscal 2015’s fourth quarter was also 16 weeks. AutoZone is a retailer and distributor of automotive parts and accessories, with 5,814 total locations at year-end across the U.S., Puerto Rico, Mexico and Brazil, plus IMC branches. It does not provide vehicle repair or installation services.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $10.636 billion | $10.187 billion |
| Gross profit / margin | $5.609 billion / 52.7% | $5.327 billion / 52.3% |
| Operating profit | $2.060 billion | $1.953 billion |
| Net income | $1.241 billion | $1.160 billion |
| Diluted EPS | $40.70 | $36.03 |
| Operating cash flow | $1.577 billion | $1.525 billion |
| Capital expenditures | $488.8 million | $480.6 million |
| Debt | $4.924 billion | $4.625 billion |
- Annual sales increased 4.4%, net income rose 7.0%, and diluted EPS increased 13.0%. Domestic comparable-store sales rose 2.4%, versus 3.8% in fiscal 2015; domestic commercial sales grew 7.1%.
- Gross margin improved 40 basis points, primarily from lower acquisition costs, partly offset by higher supply-chain costs (18 basis points). SG&A rose to 33.4% of sales from 33.1%, primarily due to higher store payroll. Operating margin was approximately 19.4%, compared with 19.2%.
- Net interest expense declined to $147.7 million from $150.4 million, as lower borrowing rates more than offset higher average borrowings. The effective tax rate was 35.1%, down from 35.6%, partly due to a discrete tax item.
- Fourth quarter: Sales were $3.399 billion, net income $426.8 million and diluted EPS $14.30, versus $3.290 billion, $401.1 million and $12.75, respectively, in the prior-year 16-week quarter.
Liquidity, capital allocation and debt
- Year-end cash was $189.7 million; current assets were $4.240 billion and current liabilities $4.690 billion, resulting in a working-capital deficit of $450.7 million. The company’s high accounts-payable-to-inventory ratio was 112.8%.
- Operating cash flow increased by $52.2 million year over year. Cash used in investing was $505.8 million, while financing activities used $1.053 billion, including $1.452 billion of share repurchases.
- Debt increased about $299.9 million during the year. AutoZone issued $650 million of senior notes in 2016, including $400 million due 2026 and $250 million due 2019. Commercial paper borrowings and the $400 million note due January 2017 were classified as long-term based on the company’s stated ability and intent to refinance.
- Available capacity under revolving credit facilities was $1.708 billion; no borrowings were outstanding under those facilities. The company reported a 5.5:1 interest-coverage ratio and 2.5x adjusted debt-to-EBITDAR, and said it was in compliance with debt covenants. The company has no common-stock dividend and repurchased 1.9 million shares for $1.452 billion in fiscal 2016.
Outlook, commentary and risks
- Management expected fiscal 2017 investment to increase, focused on new locations, supply-chain infrastructure, existing-store improvements and technology. It planned to continue expanding more frequent store deliveries and mega hubs; year-end counts were more than 1,900 stores receiving multiple weekly deliveries and 11 mega hubs.
- Management cited lower average U.S. gasoline prices in fiscal 2016 ($2.14 per gallon versus $2.69) as supportive of consumer spending. It also noted higher miles driven and an aging vehicle fleet as potential demand supports, while cautioning that economic, weather and fuel trends are uncertain.
- Key risks include weaker vehicle-parts demand, competition and online price comparisons, labor costs and staffing, supplier or import disruptions, supply-chain execution, information-security and systems failures, foreign-exchange exposure, and reduced access to financing or higher borrowing costs. A 1 percentage-point increase in rates on variable-rate debt would have reduced pretax earnings and cash flows by about $12 million at the reported debt level.
- Contingencies include environmental matters in New Jersey and California, an inquiry concerning hazardous-waste handling, a California emissions-parts matter, and employee wage-and-hour and termination lawsuits. Management did not expect these matters to have a material adverse effect; outcomes of the California matters were not predictable or fully resolved in the filing.
- The defined-benefit pension plan was underfunded by $39.1 million at year-end; fiscal 2016 contributions were $52.7 million, and approximately $17.8 million of fiscal 2017 contributions were expected. Uncertain tax-position liabilities were $25.8 million. The company reported effective internal controls and received unqualified audit opinions.
Most important facts for investors to verify
- Whether comparable-store sales and commercial growth can sustain momentum after domestic comps slowed to 2.4%.
- Whether planned higher fiscal 2017 capital investment and inventory initiatives improve availability and returns without further margin pressure.
- How ongoing repurchases are funded and how debt, refinancing needs and interest-rate exposure evolve.
- Whether cash generation and vendor payment terms remain sufficient to support expansion despite the working-capital deficit.
- Updates on legal and environmental matters, pension funding, uncertain tax positions and Mexico-related currency exposure.