AutoZone, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended August 25, 2018 (52 weeks). The filing also reports a 16-week fourth quarter; this is an annual report, not a standalone quarterly filing. AutoZone operates automotive parts retail and distribution businesses, with 6,202 stores in the U.S., Mexico and Brazil at year-end. It also sells ALLDATA software and online products and does not provide repair or installation services.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $11.221 billion | $10.889 billion |
| Domestic comparable-store sales growth | 1.8% | 0.5% |
| Gross profit / margin | $5.974 billion / 53.2% | $5.740 billion / 52.7% |
| Operating profit / margin | $1.811 billion / 16.1% | $2.080 billion / 19.1% |
| Net income | $1.338 billion | $1.281 billion |
| Diluted EPS | $48.77 | $44.07 |
| Operating cash flow | $2.080 billion | $1.571 billion |
| Capital expenditures | $521.8 million | $553.8 million |
| Debt at year-end | $5.006 billion | $5.081 billion |
- Domestic commercial sales rose 7.3% ($151.4 million). Gross margin improved on merchandise margins and asset-sale effects, partly offset by higher supply-chain costs.
- Operating expenses included $193.2 million of impairment charges and $130.3 million of pension termination charges. These items drove reported operating profit lower; the filing’s adjusted debt-to-EBITDAR measure was 2.5x, versus 2.6x in FY2017.
- The effective tax rate fell to 18.3% from 33.5%, primarily reflecting Tax Reform. FY2018 included a provisional $131.5 million tax benefit; the company said its accounting was not yet complete.
- Cash and cash equivalents were $217.8 million; working capital was a deficit of $392.8 million. The company reported $1.997 billion available under its $2.0 billion revolving credit facility and a 5.8:1 interest-coverage ratio, above its 2.5:1 covenant minimum. It reported compliance with debt covenants.
- Operating cash flow increased by $509.7 million, attributed primarily to timing of accounts-payable payments and higher net income reflecting Tax Reform benefits. Financing cash outflow was $1.632 billion, including $1.592 billion of share repurchases. Stockholders’ deficit was $1.520 billion.
Material changes and unusual items
- Sales increased 3.1%; management attributed growth mainly to new domestic stores and 1.8% domestic comparable-store sales growth. Total locations rose from 6,029 to 6,202, including 201 new locations, offset by the sale of 26 IMC branches.
- AutoZone sold substantially all AutoAnything assets in February 2018 and sold IMC in the third quarter. It recorded $193.2 million in combined impairment charges in the second quarter; sale proceeds approximated the remaining net book value at closing.
- The company terminated its frozen defined-benefit pension plans, transferring remaining obligations to an insurer and completing participant settlements. It recorded $130.3 million in non-cash termination charges; management said it would have no remaining defined-benefit obligation or periodic pension expense.
- Share repurchases totaled $1.592 billion (2.398 million shares) in FY2018. The board subsequently increased the authorization, on September 26, 2018, to $20.9 billion in total; post-year-end repurchases were also disclosed. AutoZone pays no common-stock dividend.
- For the 16-week fourth quarter, sales were $3.559 billion and diluted EPS was $15.02, versus $3.513 billion and $15.27 in the prior-year quarter. FY2018 fourth-quarter results included pension charges and benefited from Tax Reform.
Outlook, commentary and risks
- Management expected FY2019 investment in the business to increase versus FY2018, primarily for new stores, supply-chain infrastructure, existing-store enhancements and technology. No numerical sales, earnings or margin guidance is provided in the filing.
- Management cited rising U.S. wage pressure and uncertainty about its future earnings impact. Average U.S. gasoline prices were $2.67 per gallon in FY2018 versus $2.31 in FY2017; management noted that fuel costs can affect customers’ discretionary spending.
- Management pointed to long-term demand drivers including vehicle miles driven and an aging vehicle fleet: the average vehicle age was 11.7 years, while U.S. miles driven increased 0.5% year over year through July 2018. These are contextual indicators, not company guidance.
- Key risks include competition from online and physical retailers, labor-cost increases and employee retention, supplier availability and import/tariff exposure, execution of store and supply-chain expansion, economic and fuel-price changes, weather, cyber and information-system disruptions, and foreign-exchange exposure.
- Legal matters include New Jersey groundwater remediation and a state cost demand, California hazardous-waste and pollution-control-parts proceedings, and employment-related lawsuits. The company said it had accrued amounts considered probable and estimable where applicable and did not expect these matters to have a material adverse effect; outcomes remain uncertain.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting as of August 25, 2018. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of FY2018 earnings growth and operating cash flow reflects recurring operations versus Tax Reform, accounts-payable timing, impairment and pension-related items.
- Whether comparable-store and commercial-sales growth, gross-margin improvement and store expansion continue, and how wage and supply-chain costs affect operating margins.
- Debt maturities and refinancing needs, covenant headroom, liquidity availability and the sustainability of substantial share repurchases alongside planned capital investment.
- The final accounting for Tax Reform’s provisional amounts, including the transition tax and deferred-tax remeasurement.
- Final outcomes and potential costs of the disclosed environmental, regulatory and employment matters, plus execution and financial effects of the asset sales.