AutoZone, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
AutoZone is a retailer and distributor of automotive replacement parts and accessories, serving do-it-yourself customers and commercial repair businesses. It also sells ALLDATA repair software and products online; it does not provide vehicle repair or installation services. At August 27, 2011, it operated 4,534 U.S. and Puerto Rico stores and 279 stores in Mexico, including commercial sales programs at 2,659 domestic stores.
The filing covers the 52-week fiscal year ended August 27, 2011. Fiscal Q4 was a 16-week period; quarterly comparisons should account for the longer quarter.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $8.073 billion | $7.363 billion |
| Gross profit / margin | $4.119 billion / 51.0% | $3.712 billion / 50.4% |
| Operating profit / margin | $1.495 billion / 18.5% | $1.319 billion / 17.9% |
| Net income / net margin | $849.0 million / 10.5% | $738.3 million / 10.0% |
| Diluted EPS | $19.47 | $14.97 |
| Operating cash flow | $1.292 billion | $1.196 billion |
| Capital expenditures | $321.6 million | $315.4 million |
| Debt at year-end | $3.352 billion | $2.908 billion |
Domestic comparable-store sales increased 6.3%. Domestic retail sales rose 6.8% and commercial sales rose 22.3%. The company reported 188 new stores and two closures, ending the year with 4,813 stores. Gross margin improved 60 basis points, primarily from lower shrink expense and higher merchandise margins; SG&A was 32.5% of sales in both years. Higher average borrowings contributed to increased net interest expense of $170.6 million, despite a lower weighted-average borrowing rate.
Cash and cash equivalents were $97.6 million. Working capital was a deficit of $638.5 million; current assets were $2.792 billion and current liabilities were $3.431 billion. Operating cash flow benefited in part from vendor financing of inventory: accounts payable were 112% of inventory, up from 106%. Stockholders’ deficit was $1.254 billion, reflecting substantial share repurchases. The company repurchased $1.467 billion of shares in FY2011 and paid no common dividend.
Material changes, outlook and management commentary
- Sales increased 9.6% and net income rose 15.0% year over year. Diluted EPS increased 30.0%; management attributed approximately $1.15 of FY2011 EPS to share repurchases.
- Management linked sales strength to higher comparable-store sales, new-store contributions, and an aging vehicle fleet. It noted that rising gasoline prices—up $0.95 per gallon during FY2011—pressured discretionary and maintenance-category demand.
- Failure and maintenance categories represented approximately 83% of sales. Management said failure-related categories remained strongest, while maintenance and discretionary categories softened somewhat.
- For FY2012, management expected investment in the business to increase versus FY2011, mainly for new stores and improvements to existing stores and infrastructure. No specific sales, earnings, margin, or store-opening guidance was provided.
- In September 2011, the revolving credit facility was amended, increasing capacity from $800 million to $1.0 billion and extending maturity to September 2016. Management reported covenant compliance at year-end; the interest-coverage ratio was 4.44:1 versus a 2.50:1 minimum. Adjusted debt to EBITDAR was 2.4:1.
- Principal risks include competitive pressure, changes in repair and maintenance demand, fuel and supplier costs, labor availability, supply-chain or technology interruptions, access to financing and credit-rating changes. The company also identified exposure to variable interest rates and Mexican peso translation.
- The company was defending an aftermarket-pricing lawsuit; the court denied plaintiffs’ request to amend on September 28, 2011. AutoZone said it could not estimate a loss or range of loss. Management did not expect the cited environmental-remediation or other employee litigation matters to be material.
Important facts for investors to verify
- Whether comparable-store and commercial-sales growth persists, particularly if fuel prices, economic conditions, or vehicle-age trends change.
- How planned higher FY2012 capital investment and continued store expansion affect returns, cash generation, and debt.
- The sustainability of vendor payment terms and inventory financing, given the already negative working capital position.
- Debt maturities, borrowing capacity, covenant headroom, and sensitivity to interest-rate increases; variable-rate debt was $601.7 million at year-end.
- Share-repurchase pace and funding, including the September 2011 authorization increase, and the effect of repurchases on leverage and per-share results.
- Developments in the unresolved lawsuit, pension funding and assumptions, self-insurance estimates, and other contingencies.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.