AutoZone, Inc. — Fiscal 2016 First-Quarter 10-Q
Reporting period: Twelve weeks ended November 21, 2015, compared with the twelve weeks ended November 22, 2014. The interim statements are unaudited; the independent accountant performed a review, not an audit. AutoZone cautions that this quarter is not necessarily indicative of full-year results.
Business context
AutoZone sells automotive replacement parts and accessories through retail stores, commercial programs, distribution branches and online channels; it also sells ALLDATA automotive repair software. At quarter-end, it operated 5,163 U.S. stores, 442 in Mexico, eight in Brazil and 22 IMC branches. The business is seasonal, with sales generally strongest February through September and weakest in December and January.
Financial results and liquidity
| Metric | Q1 FY2016 | Comparable prior quarter |
|---|---|---|
| Net sales | $2.386 billion | $2.260 billion |
| Gross profit / margin | $1.253 billion / 52.5% | $1.177 billion / 52.1% |
| Operating profit | $438.0 million | $408.6 million |
| Net income | $258.1 million | $238.3 million |
| Diluted EPS | $8.29 | $7.27 |
| Operating cash flow | $323.5 million | $375.2 million |
| Capital expenditures | $86.7 million | $92.4 million |
Gross margin improved 0.4 percentage points, while SG&A rose to 34.2% of sales from 34.0%; operating margin was approximately 18.4% versus 18.1%, and net margin approximately 10.8% versus 10.5%. Net interest expense declined to $35.0 million from $37.1 million. The effective tax rate was 35.9% in both periods.
Cash and cash equivalents were $165.5 million at November 21, 2015. Current assets were $4.054 billion against current liabilities of $4.775 billion. Long-term debt was $4.754 billion on the balance sheet; total debt before discounts and issuance costs was $4.776 billion, including $1.476 billion of commercial paper. Debt less cash was approximately $4.610 billion. Stockholders’ deficit was $1.778 billion.
Operating cash flow was lower year over year, primarily due to working-capital timing, partly offset by higher net income. Investing cash use was $101.1 million, compared with $180.8 million, which included the prior-year $75.7 million IMC acquisition. Financing cash use was $233.4 million; the quarter included $400.1 million of share repurchases and repayment of $300 million in senior notes, funded with commercial paper. AutoZone repurchased 536,654 shares during the quarter at an average $745.55 per share.
Changes versus the prior comparable period
- Sales increased 5.6%; domestic same-store sales grew 3.5%, and new stores contributed $39.5 million in sales.
- Net income increased $19.8 million, and diluted EPS rose 14.0%. Management attributed $0.40 of current-quarter diluted EPS to share repurchases since the comparable prior-year period.
- Higher merchandise margins improved gross margin, partly offset by supply-chain costs from inventory initiatives. Higher domestic store payroll and IMC affected SG&A, partly offset by comparison with higher legal costs in the prior year.
- Average borrowings increased to $4.654 billion from $4.343 billion, but the weighted-average borrowing rate fell to 2.9% from 3.4%.
- Trailing-four-quarter ROIC declined to 31.2% from 31.9%, which management attributed primarily to higher average debt and recent investments. Adjusted debt to EBITDAR remained 2.5:1.
Outlook, risks and unusual items
- Management expected fiscal 2016 investment to increase versus fiscal 2015, primarily for new locations, supply-chain infrastructure, existing-store enhancements and technology. It planned to continue more frequent store deliveries and the mega-hub strategy.
- Management expects to rely mainly on internally generated funds and available borrowing capacity for capital spending, working capital and repurchases, with new borrowings potentially funding the balance. At quarter-end, revolving facilities had $1.708 billion available; no revolving-facility borrowings were outstanding. The company reported covenant compliance.
- Lower gasoline prices were cited as potentially supporting consumers’ spending capacity, but management said future fuel-price movements and their sales effects are unpredictable. Weather, miles driven, vehicle age, economic conditions, competition, labor, financing access, energy costs and cybersecurity are among the risks discussed.
- The company increased its repurchase authorization by $750 million to $16.4 billion; $697.7 million remained at quarter-end. Subsequent to quarter-end, it repurchased another 102,658 shares for $80.0 million.
- AutoZone is cooperating with a California subpoena concerning hazardous-waste handling, storage and disposal; it said it could not predict the outcome. It also disclosed New Jersey remediation-related claims and employee lawsuits, which it did not believe would cause material liabilities. No material risk-factor changes from the latest 10-K were reported.
- Management changed its pension interest-cost estimate method prospectively; it reduced quarterly pension expense by $411,000 and was expected to reduce fiscal 2016 expense by about $1.8 million. The company also expects to reclassify $1.9 million of derivative losses into interest expense over the next 12 months.
Important facts for investors to verify
- Whether same-store sales momentum, merchandise margins and sales growth persist beyond this seasonally weaker quarter.
- Whether supply-chain and inventory initiatives deliver benefits sufficient to offset their costs, and how inventory levels and supplier payment terms evolve.
- Debt and commercial-paper refinancing capacity, interest-rate exposure, and the effect of continued share repurchases on leverage and returns.
- Execution and returns from planned store, supply-chain and technology investments, given the reported decline in ROIC.
- Developments in the California environmental inquiry, New Jersey remediation matter and employment litigation.