01—Abstract
Summary
Summary of the 10-K filed November 27, 1996. Cited figures are marked; the original filing is the authoritative source.
AutoZone's fiscal 1996 10-K (fiscal year ended August 31, 1996, a 53-week year) shows a company in rapid expansion and still growing profitably.
Net sales rose 24% to $2.24 billiona, operating profit increased 18% to $268.9 million, and net income grew 20% to $167.2 million, or $1.11 per share. Comparable store sales increased 6%, and gross margin improved modestly to 41.7% of sales. The results were partly offset by a higher SG&A ratio (29.7% vs. 28.9%), driven by ALLDATA acquisition costs and startup costs for the commercial sales program.
Operating margin slipped to 12.0%b from 12.6%, and net margin to 7.5% from 7.7%. The 53rd week contributed to the top-line figures, so growth on a comparable basis is somewhat lower than reported. The central investment story is store growth.
AutoZone opened a record 280 net new stores, ending the year with 1,423 stores in 27 states, and plans roughly 335 openings in fiscal 1997, which implies about 26%c growth in square footage. Management is also pushing into the professional repair shop market through a commercial sales program now in 1,183 stores. Management acknowledges that this program is currently unprofitable and that there is no assurance it will improve results.
The company also acquired ALLDATA, a diagnostic software business, in a pooling-of-interests transaction. Balance sheet and cash flow both show the cost of expansion. Inventory rose $160 million to $556 milliond, and capital expenditures reached $288 million against $174 million of operating cash flow.
Revolver borrowings climbed to $94.4 million from $9.5 million, and debt-to-capital rose to 9.8% from 1.9%. Return on average equity remained strong at 22%. The filing also notes that KKR's ownership fell from about 43% to about 13%, which reduces the influence of a major shareholder.
02—Key points
Key Highlights
- Sales increased 24% to $2.24 billion (includes a 53rd week); comparable store sales rose 6%.
- Net income rose 20% to $167.2 million; EPS of $1.11 vs. $0.93 in fiscal 1995 (+19%).
- Opened a record 280 net new stores, reaching 1,423 stores in 27 states; plans about 335 openings in fiscal 1997.
- Operating margin declined to 12.0% from 12.6%, mainly due to higher SG&A from ALLDATA and the commercial sales program.
- Commercial (professional repair shop) sales program was in 1,183 stores at year-end; management says it is currently unprofitable.
- Inventory rose to $556 million and capex to $288 million, pushing revolver borrowings to $94.4 million and debt-to-capital to 9.8%.
- Acquired ALLDATA Corp. in a stock-for-stock pooling of interests (approximately 1.7 million shares issued).
03—Questions
Frequently Asked Questions
How strong was AutoZone's growth in fiscal 1996?
Growth was strong. Sales rose 24% to $2.24 billion, operating profit rose 18% to $268.9 million, and net income rose 20% to $167.2 million. Part of the sales increase came from a 53rd week, and comparable store sales grew 6%.
Are margins improving or deteriorating?
Gross margin improved slightly to 41.7% from 41.5%, but operating margin fell to 12.0% from 12.6% and net margin fell to 7.5% from 7.7%. The decline came from higher SG&A, which rose to 29.7% of sales, reflecting ALLDATA integration costs and commercial program expenses.
What are the main risks to the growth strategy?
The growth plan depends on opening stores profitably in both existing and new markets. New stores can cannibalize sales at older locations. The commercial sales program is currently unprofitable and may not improve results. Growing inventory and debt also increase financing needs, and the company relies on favorable supplier payment terms to fund much of its inventory growth.
How is AutoZone funding its expansion?
Primarily through internally generated cash, supplemented by borrowings. Operating cash flow was $174 million against $288 million in capital expenditures. Revolver borrowings rose to $94.4 million, and the company has a $125 million credit facility with $30.6 million available. Stock option exercises, with $175 million potentially available from outstanding options, are an additional source of capital.
Is there any ownership or governance change investors should note?
KKR's combined ownership fell from about 43% to about 13% of common stock over the year. Management also changed: John Adams became Vice Chairman and COO, Tim Vargo became Vice Chairman, and President Tom Hanemann planned to retire on December 12, 1996, with Adams expected to succeed him.
04—Continue