How is AutoZone funding its store expansion?

The company relies mainly on internally generated cash, supplemented by borrowings. Long-term debt under a $275 million revolving credit facility rose to $198.4 million from $94.4 million. Management also depends on favorable supplier payment terms to finance much of its inventory growth, though it cannot guarantee those terms will continue.

What are the main risks highlighted in the filing?

Risks include competitive pressures, consumer debt levels, weather, the economy, and inflation. The company also faces its ability to open stores profitably and sustain comparable store sales growth. Rising inventory and debt levels and the costs of the new commercial program and ALLDATA are additional pressures on operating expenses.

What is the status of the battery-related lawsuits?

The Elliott case was dismissed without prejudice in September 1997 at the plaintiffs' request. The Proffitt case, filed in October 1997 in Tennessee, seeks class certification across multiple states and damages for allegedly selling old or used batteries as new. Management believes the claims are without merit and intends to defend vigorously. The filing does not state a dollar amount of potential exposure.

What is the company's growth outlook for fiscal 1998?

Management plans to open approximately 350 stores in fiscal 1998, which would increase total store square footage by about 22%. It expects the commercial sales program to continue to benefit same-store sales and earnings and plans to keep focusing on the core do-it-yourself business. Growth depends on opening stores profitably and on continued increases in sales at existing stores.

AZO 10-K FY1997 Annual Report — Revenue, Net Income, EPS

Q: How much did AutoZone grow in fiscal 1997?

Net sales increased 20% to $2.69 billion, operating profit rose 19% to $321 million, and net income grew 17% to $195 million, or $1.28 per share. Comparable store sales increased 8%. The fiscal 1996 base included a 53rd week, which modestly inflates the reported growth rate.

01—Abstract

Summary

Summary of the 10-K filed November 6, 1997. Cited figures are marked; the original filing is the authoritative source.

AutoZone's fiscal 1997 10-K (fiscal year ended August 30, 1997) describes a company that continued to execute a rapid store expansion strategy while delivering record financial results.

Sales rose 20% to $2.69 billion^a, operating profit grew 19% to $321 million, and net income increased 17% to $195 million, or $1.28 per share. Comparable store sales increased 8%, and the company ended the year with 1,728 stores in 32 states after a net addition of 305 stores, a roughly 23% increase in square footage. Management also highlights the entry into five new states (California, Iowa, Maryland, Nevada, and New York) and the first profitable year for its commercial sales program, which now accounts for more than 10% of sales.

The key watch items for investors are margin and balance sheet trends. The operating expense ratio rose from 29.7% to 30.1% of sales, driven by ALLDATA and commercial program costs, although gross margin improved to 42.0% from 41.7%. Debt rose sharply to $198.4 million^b from $94.4 million as the company financed inventory growth, and inventory turnover fell to 2.5x from 2.7x.

Return on average equity declined to 20%^c from 22%, and return on capital dropped to 16% from 18%. Management expects roughly 350 new stores in fiscal 1998 and continued reliance on supplier payment terms to fund inventory growth. The filing also discloses two purported class actions alleging the company sold old or used batteries as new.

One case was dismissed without prejudice in September 1997, while the other, filed in October 1997, is being contested by management, which considers the claims without merit. The company does not expect other pending litigation to have a material adverse effect. Overall, the filing portrays a growth story with strong earnings momentum, offset by rising leverage, working capital intensity, and modest margin pressure from new initiatives.

02—Key points

Key Highlights

Sales grew 20% to $2.69 billion in fiscal 1997, with comparable store sales up 8%, though the 53-week fiscal 1996 comparison slightly flatters the reported growth rate.
Net income rose 17% to $195.0 million and EPS increased 15% to $1.28, with operating profit up 19% to $321.4 million.
The company opened 305 net new stores, ending the year with 1,728 stores in 32 states, and plans roughly 350 openings in fiscal 1998.
Gross margin improved to 42.0% from 41.7%, mainly from better leverage of warehouse and delivery costs, while SG&A rose to 30.1% of sales from 29.7%.
Total debt increased to $198.4 million from $94.4 million, and inventory turnover declined to 2.5x from 2.7x, reflecting growth-driven working capital needs.
Return on average equity fell to 20% from 22% and after-tax return on capital dropped to 16% from 18%, as the equity base grew faster than earnings.
Two purported class actions allege the company sold old or used batteries as new; one was dismissed without prejudice and management considers the other without merit.

03—Questions

Frequently Asked Questions

How much did AutoZone grow in fiscal 1997?
Net sales increased 20% to $2.69 billion, operating profit rose 19% to $321 million, and net income grew 17% to $195 million, or $1.28 per share. Comparable store sales increased 8%. The fiscal 1996 base included a 53rd week, which modestly inflates the reported growth rate.
How is AutoZone funding its store expansion?
The company relies mainly on internally generated cash, supplemented by borrowings. Long-term debt under a $275 million revolving credit facility rose to $198.4 million from $94.4 million. Management also depends on favorable supplier payment terms to finance much of its inventory growth, though it cannot guarantee those terms will continue.
What are the main risks highlighted in the filing?
Risks include competitive pressures, consumer debt levels, weather, the economy, and inflation. The company also faces its ability to open stores profitably and sustain comparable store sales growth. Rising inventory and debt levels and the costs of the new commercial program and ALLDATA are additional pressures on operating expenses.
What is the status of the battery-related lawsuits?
The Elliott case was dismissed without prejudice in September 1997 at the plaintiffs' request. The Proffitt case, filed in October 1997 in Tennessee, seeks class certification across multiple states and damages for allegedly selling old or used batteries as new. Management believes the claims are without merit and intends to defend vigorously. The filing does not state a dollar amount of potential exposure.
What is the company's growth outlook for fiscal 1998?
Management plans to open approximately 350 stores in fiscal 1998, which would increase total store square footage by about 22%. It expects the commercial sales program to continue to benefit same-store sales and earnings and plans to keep focusing on the core do-it-yourself business. Growth depends on opening stores profitably and on continued increases in sales at existing stores.

04—Continue

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