AutoZone, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Twelve weeks ended May 5, 2012; year-to-date figures cover 36 weeks. Financial statements are unaudited. AutoZone operates automotive parts stores in the U.S. and Mexico, alongside ALLDATA and e-commerce businesses. At quarter-end it had 4,910 stores.
Financial performance and position
- Quarter revenue: $2.112 billion, up 6.7% year over year. Domestic same-store sales grew 3.9%; management attributed the increase to higher transaction value, partly offset by fewer transactions.
- Quarter profit: Gross profit was $1.090 billion, with gross margin of 51.6% versus 51.2%. Operating profit was $427.3 million; net income was $248.6 million, up 9.3%. Diluted EPS rose 18.6% to $6.28, including an estimated $0.47 benefit from share repurchases.
- 36-week results: Revenue was $5.840 billion, up 7.5%; gross margin was 51.4% versus 50.9%. Net income increased to $606.6 million from $547.5 million, and diluted EPS rose 22.1% to $15.08. Repurchases contributed an estimated $0.87 to year-to-date diluted EPS.
- Cash flow: Operating cash flow was $798.6 million, down from $896.9 million, primarily due to changes in inventory net of payables. Capital expenditures were $228.3 million, versus $200.6 million. Cash ended at $103.1 million.
- Debt and liquidity: Debt was approximately $3.606 billion, including $3.599 billion of long-term debt and $7.3 million of short-term borrowings. The company issued $500 million of 3.70% senior notes due 2022, using proceeds partly to repay commercial paper. It reported $619.3 million of available revolving-credit capacity; separately, the filing states $996.6 million of availability excluding commercial paper borrowings. Management said it could refinance obligations due within 12 months and reported compliance with debt covenants. Adjusted debt/EBITDAR was 2.5x versus 2.4x a year earlier.
- Balance sheet: Current assets were $2.944 billion against current liabilities of $3.567 billion. Stockholders’ deficit was $1.417 billion. The filing reports trailing-four-quarter ROIC of 32.7%, up from 30.2%.
Material changes versus comparable periods
- Quarter revenue growth reflected domestic same-store sales growth and $53.9 million of new-store sales; year-to-date new-store sales were $148.5 million. Year-to-date domestic comparable same-store sales grew 4.7%.
- Gross-margin improvement came mainly from lower shrink and distribution-cost leverage. Quarter SG&A was 31.4% of sales, unchanged year over year; year-to-date SG&A was also 33.1% of sales, unchanged.
- Average borrowings increased, but lower weighted-average borrowing rates partly offset the effect on interest expense. Quarter interest expense was nearly flat; year-to-date interest expense increased modestly.
- Repurchases totaled $882.7 million during the 36 weeks. The board increased authorization by $750 million to $11.9 billion; $835.9 million remained at quarter-end. After quarter-end, the company repurchased a further 893,910 shares for $335.5 million.
Outlook, commentary, risks and unusual items
- Management expected FY2012 capital expenditures to rise 15%–20% versus FY2011, principally for new stores and improvements to stores and infrastructure. It expected to rely mainly on internally generated funds and available borrowing capacity, with new borrowing as needed. No specific revenue or EPS guidance is provided.
- Management cited older vehicles and consumers keeping cars longer as potential demand supports, while noting that elevated gasoline prices may constrain discretionary spending. Milder winter weather shifted some maintenance purchases into January and February; miles driven had declined slightly year to date through March, the latest data cited.
- Management cautioned that results are seasonal and interim performance may not indicate full-year results. Risks cited include economic conditions, competition, demand, weather, inflation, energy and supplier costs, financing access, and regulatory changes.
- A long-running antitrust lawsuit was settled confidentially and dismissed with prejudice in April 2012. A New Jersey groundwater-remediation matter remains unresolved; management did not expect material costs but could not quantify potential additional costs. Other employment-related lawsuits were also disclosed, with no material liability expected by management.
- After quarter-end, AutoZone entered two treasury-rate locks tied to an anticipated debt transaction. Management said their eventual gain or loss would be deferred and amortized to interest expense over the related debt’s life.
Important facts for investors to verify
- Whether same-store sales growth can persist if transaction counts, gasoline prices, miles driven, or weather patterns weaken.
- How higher planned capital spending and continued share repurchases affect cash generation, debt levels, and leverage.
- The refinancing plan and terms for commercial paper and senior notes coming due within 12 months.
- Whether inventory growth, vendor payment terms, and accounts payable funding remain sustainable; accounts payable were 109% of gross inventory at quarter-end.
- Developments and potential costs in the New Jersey remediation matter, and the outcome of other disclosed litigation.