AutoZone, Inc. — Form 10-Q Summary
Business context and period. AutoZone retails and distributes automotive parts and accessories, with 4,491 stores in the U.S. and Mexico, commercial sales operations, ALLDATA software and e-commerce. This filing covers the 12 and 24 weeks ended February 13, 2010; comparisons are with periods ended February 14, 2009. The business is seasonal, with winter generally the weakest sales quarter. Interim results are not necessarily indicative of the full fiscal year ending August 28, 2010.
Financial performance
| Metric | 12 weeks ended Feb. 13, 2010 | Prior-year 12 weeks | 24 weeks ended Feb. 13, 2010 | Prior-year 24 weeks |
|---|---|---|---|---|
| Net sales | $1,506.2 million | $1,447.9 million | $3,095.5 million | $2,926.2 million |
| Gross profit / margin | $753.7 million / 50.0% | $719.3 million / 49.7% | $1,553.7 million / 50.2% | $1,460.5 million / 49.9% |
| Operating profit | $230.4 million | $214.7 million | $490.8 million | $453.2 million |
| Net income | $123.3 million | $115.9 million | $266.6 million | $247.2 million |
| Diluted EPS | $2.46 | $2.03 | $5.28 | $4.26 |
- Quarterly sales grew 4.0%; domestic same-store sales increased 1.0%. For the 24-week period, sales grew 5.8% and domestic comparable-store sales increased 3.4%. Growth reflected higher transaction value, partly offset by lower transaction count, as well as sales from new stores.
- Gross margin improved 36 basis points in the quarter and 28 basis points year to date. Management cited favorable shrink comparisons, sales mix and lower product acquisition costs; year-to-date distribution cost leverage also helped.
- Quarterly SG&A was $523.4 million, or 34.7% of sales, versus 34.9% a year earlier. Year-to-date SG&A was $1,062.9 million, or 34.3%, versus 34.4%. Expense discipline and sales leverage were partly offset by hub-store investment and higher pension expense.
- Net interest expense rose to $36.3 million for the quarter and $72.7 million year to date, primarily due to higher average borrowings. Quarterly average borrowings were $2.794 billion versus $2.415 billion; average rates declined to 5.2% from 5.4%.
Cash flow, liquidity and debt
- For the 24 weeks, operating cash flow was $348.9 million, compared with $148.3 million in the prior-year period. Management attributed the increase principally to tax-payment timing and improved accounts payable; vendor financing of inventory remained an important source of working capital.
- Investing activities used $109.3 million, including $111.1 million of capital expenditures, up from $98.1 million. The company opened 74 net new stores, including 14 in Mexico.
- Financing activities used $227.4 million. AutoZone repurchased $291.9 million of stock, compared with $647.2 million in the prior-year period. Cash increased $12.5 million to $105.2 million.
- At February 13, 2010, debt was $2.775 billion, including $325.4 million of commercial paper; debt at August 29, 2009 was $2.727 billion. Debt fair value was estimated at $2.983 billion, $207.9 million above carrying value.
- The $800 million revolving facility expires in July 2012; reported available capacity, after commercial paper and other reductions, was $323.1 million. The company stated it had the ability and intent to refinance the $199.3 million of notes due November 2010 and commercial paper on a long-term basis. It was in compliance with debt covenants.
- Current assets were $2.649 billion and current liabilities were $2.749 billion. Stockholders’ deficit was $421.7 million. The balance sheet shows cash of $105.2 million and inventory of $2.262 billion.
Material changes, outlook and risks
- Diluted EPS increased 21.2% for the quarter and 23.9% year to date. Management estimated that repurchases since the comparable prior-year period added $0.25 to quarterly diluted EPS and $0.49 to year-to-date diluted EPS.
- The board increased cumulative repurchase authorization to $8.4 billion; $517.2 million remained available at February 13. The company repurchased 1.98 million shares for $291.9 million during the 24-week period.
- Management expects fiscal 2010 investment generally consistent with historical levels, primarily for new stores and improvements to existing stores and systems. It expects to rely mainly on internally generated funds and available borrowing capacity, with possible new borrowing. No specific sales or earnings guidance was provided. Management expected an approximately 37% tax rate for the remainder of the year, subject to operating results and discrete tax events.
- Management cited challenging economic conditions, including high unemployment, as supportive of sales, and noted improved miles driven and an aging U.S. vehicle fleet. Failure-related product categories performed best in the quarter. It also identified credit-market conditions, recession, competition, demand, labor availability, consumer debt, inflation, weather, supplier costs, energy prices, financing access and regulatory changes as risks.
- Quarterly SG&A benefited from a favorable credit-card class-action settlement (17 basis points of sales); the filing also notes higher pension expense. Year-to-date pension expense was $4.8 million versus pension income of $0.9 million in the prior-year period. No additional material legal proceedings or material changes to previously disclosed risk factors were reported.
- Standby letters of credit totaled $123.7 million and surety bonds $16.4 million at February 13, 2010. Management reported no significant changes to contractual obligations. The auditor performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether comparable-store sales, transaction trends and new-store contributions can sustain revenue growth.
- How much future EPS growth depends on share repurchases versus operating performance, and how repurchases will be funded.
- Refinancing plans and costs for the 2010 notes and commercial paper, facility availability, credit ratings and covenant headroom.
- Whether operating cash-flow growth persists, given the stated effects of tax-payment timing and vendor financing of inventory.
- Execution and returns on store expansion and hub-store investment, and the effect of pension costs and seasonal trading on full-year results.
- Potential sensitivity to interest rates, economic conditions, supplier financing, and the other risks identified by management.