Business Context and Reporting Period
Company: AutoZone, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 9, 2009 (Twelve and Thirty-Six Weeks)
Business Overview: AutoZone is the nation's leading retailer and distributor of automotive parts and accessories. As of May 9, 2009, the company operated 4,340 stores, including 168 in Mexico. The business is seasonal, with peak sales typically occurring in spring and summer.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 12 Weeks Ended May 9, 2009 | 36 Weeks Ended May 9, 2009 |
|---|---|---|
| Net Sales | $1,658,160 | $4,584,330 |
| Gross Profit | $832,907 | $2,293,396 |
| Gross Margin | 50.2% | 50.0% |
| Operating Profit | $305,232 | $758,466 |
| Net Income | $173,689 | $420,923 |
| Diluted EPS | $3.13 | $7.36 |
| Cash from Operations (36 wks) | $535,020 | |
| Total Debt (Gross) | $2,405,900 | |
| Cash and Equivalents | $94,287 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.3% for the quarter and 6.3% for the year-to-date period compared to the prior year. Growth was driven by a 7.4% increase in domestic same-store sales and $62.6 million in sales from new stores for the quarter.
- Profitability: Net income rose 9.5% for the quarter and 5.8% year-to-date. Diluted earnings per share increased significantly (25.9% for the quarter, 19.0% year-to-date) primarily due to aggressive stock repurchases reducing the share count.
- Expense Management: Operating expenses as a percentage of sales decreased slightly (31.8% vs. 32.2% for the quarter) due to leverage from higher sales volumes, partially offset by higher incentive compensation and hub store investments.
- Interest Expense: Net interest expense increased to $31.5 million for the quarter (from $25.3 million) due to higher average borrowing levels ($2.516 billion vs. $2.020 billion).
- Balance Sheet: Cash and cash equivalents decreased from $242.5 million to $94.3 million, largely due to $712.6 million in stock repurchases during the 36-week period.
Guidance, Outlook, and Risks
- Outlook: Management expects to invest in the business consistent with historical rates, focusing on new store development and system enhancements. They anticipate relying on internally generated funds and available borrowing capacity for capital expenditures and repurchases.
- Debt Refinancing: The company is refinancing $456.6 million in short-term obligations (a $300 million term loan and $156.6 million in commercial paper) currently classified as current liabilities. Management expects to renegotiate and extend revolving credit facilities in the fourth quarter of fiscal 2009 to reclassify these as long-term.
- Market Risks: The company faces risks related to the credit crisis, higher unemployment, and declining miles driven. However, management notes that lower gas prices have increased consumer spending capacity. The company uses interest rate swaps to fix rates on variable debt and fuel swaps to hedge unleaded fuel exposure.
- Stock Repurchases: As of May 9, 2009, $396.5 million remained under the Board's authorization. On June 17, 2009, this authorization was increased by $500 million to a total of $7.9 billion.
Investor Verification Checklist
- Debt Classification: Verify the successful renegotiation of the $456.6 million in short-term debt to long-term status in the upcoming quarter to avoid liquidity strain.
- Same-Store Sales Trend: Monitor the sustainability of the 7.4% same-store sales growth given the macroeconomic headwinds of declining miles driven and high unemployment.
- Share Count Reduction: Confirm the impact of the $712.6 million in recent stock buybacks on future earnings per share versus total net income growth.
- Inventory Levels: Review the $2.24 billion inventory balance against sales velocity to ensure no excess build-up given the economic environment.
- Derivative Exposure: Assess the impact of the fuel swap contract (not designated as a hedge) on operating expenses if fuel prices fluctuate significantly.