How did AutoZone perform financially in fiscal 1998?

Net sales reached $3.24 billion, up 20.5%, and net income reached $227.9 million, up 16.9%. Diluted EPS was $1.48, compared with $1.28 in fiscal 1997. Return on average equity was 19%, down from 20%.

What drove the growth, and how sustainable is it?

Most growth came from new and acquired stores; net new stores rose by 929. Comparable store sales increased only 2%, down from 8% in fiscal 1997, so organic same-store growth slowed considerably. Growth therefore depends heavily on continued expansion and acquisitions.

Is AutoZone taking on more financial risk?

Yes. Long-term debt rose to $545 million from $198 million, and debt-to-capital increased to 29.5% from 15.6%. Net interest expense rose to $18.2 million from $8.8 million. Management says it expects to keep financing much of its inventory growth through favorable supplier payment terms, but it notes there is no assurance those terms will continue.

Does the seasonality of the business matter for investors?

Significantly. The fourth quarter is a 16-week period that covers the summer peak, and it represented 37.5% of fiscal 1998 net sales and 40.4% of net income. Weather also strongly affects sales, since extreme heat or cold tends to boost part failures and sales.

Are there material legal or transaction risks disclosed?

The main disclosed legal matter is a California class action against Chief Auto Parts alleging denial of mandated rest periods. Management could not predict the outcome, though it considers individual damages minimal; a class-wide win could be substantial. Separately, the proposed Pep Boys Express store acquisition (about $108 million) was expected to close by the end of the first quarter of fiscal 1999 and was not expected to be material to results.

AZO 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed March 4, 2002. Cited figures are marked; the original filing is the authoritative source.

This amended Form 10-K (10-K/A) for AutoZone's fiscal year ended August 29, 1998 was filed to attach the Annual Report excerpts (Exhibit 13.1) physically, rather than incorporating them by reference.

Note that the document's content is from fiscal 1998 and its auditor's report is dated September 30, 1998. The stated filing date of March 4, 2002 does not match the document, so investors should verify the filing date against EDGAR. The filing reports a strong year: net sales rose 20.5% to $3.24 billion^a, operating profit rose 19% to $382.3 million, and net income rose 16.9% to $227.9 million, or $1.48 per diluted share versus $1.28 a year earlier.

Growth was driven mainly by store expansion, with net new stores up 929 to 2,657, including the acquisitions of Chief Auto Parts (560 stores, primarily in California), Auto Palace (112 stores in the Northeast), and TruckPro (43 heavy-duty truck parts stores). Comparable store sales grew only 2%, and gross margin slipped to 41.7% from 42.0%, reflecting lower commodities margins and weaker margins at recently acquired stores. The balance sheet expanded sharply, with total assets of $2.75 billion^b (up from $1.88 billion) and long-term debt of $545 million (up from $198 million).

Much of the increase reflects the $200 million^c 6.5% Debentures due 2008 issued in July 1998, $305 million of commercial paper, and the assumption of acquired companies' debt. Debt-to-capital rose to 29.5% from 15.6%. Operating cash flow improved to $366.8 million from $177.6 million, driven mainly by better inventory turnover and favorable supplier payment terms, which the company relies on to finance inventory growth.

Capital expenditures were $337.2 million^d. Management also disclosed a subsequent agreement to acquire real estate and leases for roughly 100 Express stores from Pep Boys for about $108 million, and a pending class action against Chief Auto Parts over California rest-period practices, which management could not predict the outcome of.

For investors, the key trade-offs were rapid, acquisition-fueled growth and higher leverage against a return on average equity of 19%, down from 20%, and a 2% comparable store sales increase that signaled slowing organic growth. The fourth quarter, a 16-week period, contributed 37.5% of annual sales and 40.4% of net income, which makes the business highly seasonal.

02—Key points

Key Highlights

Net sales grew 20.5% to $3,242.9 million, while diluted EPS rose 15.6% to $1.48 from $1.28.
Store base expanded to 2,657 locations (net +929) through acquisitions of Chief Auto Parts, Auto Palace, and TruckPro, but comparable store sales grew only 2%.
Gross margin declined to 41.7% from 42.0%, due to lower commodities margins and weaker margins at recently acquired stores; operating margin held near 11.8%.
Operating cash flow rose to $366.8 million from $177.6 million, supported by improved inventory turnover and favorable supplier payment terms.
Debt increased to $545 million (debt-to-capital 29.5% vs. 15.6%), largely from the $200 million 6.5% Debentures due 2008 and $305 million of commercial paper, with a $100 million share repurchase program started (about $28.7 million executed).
Subsequent event: agreement to acquire real estate and leases for about 100 Express stores from Pep Boys for approximately $108 million.
Risks disclosed include a class action against Chief Auto Parts over California mandated rest periods (damages could be substantial if plaintiffs prevail) and an estimated $12 million Year 2000 remediation cost.

03—Questions

Frequently Asked Questions

How did AutoZone perform financially in fiscal 1998?
Net sales reached $3.24 billion, up 20.5%, and net income reached $227.9 million, up 16.9%. Diluted EPS was $1.48, compared with $1.28 in fiscal 1997. Return on average equity was 19%, down from 20%.
What drove the growth, and how sustainable is it?
Most growth came from new and acquired stores; net new stores rose by 929. Comparable store sales increased only 2%, down from 8% in fiscal 1997, so organic same-store growth slowed considerably. Growth therefore depends heavily on continued expansion and acquisitions.
Is AutoZone taking on more financial risk?
Yes. Long-term debt rose to $545 million from $198 million, and debt-to-capital increased to 29.5% from 15.6%. Net interest expense rose to $18.2 million from $8.8 million. Management says it expects to keep financing much of its inventory growth through favorable supplier payment terms, but it notes there is no assurance those terms will continue.
Does the seasonality of the business matter for investors?
Significantly. The fourth quarter is a 16-week period that covers the summer peak, and it represented 37.5% of fiscal 1998 net sales and 40.4% of net income. Weather also strongly affects sales, since extreme heat or cold tends to boost part failures and sales.
Are there material legal or transaction risks disclosed?
The main disclosed legal matter is a California class action against Chief Auto Parts alleging denial of mandated rest periods. Management could not predict the outcome, though it considers individual damages minimal; a class-wide win could be substantial. Separately, the proposed Pep Boys Express store acquisition (about $108 million) was expected to close by the end of the first quarter of fiscal 1999 and was not expected to be material to results.

04—Continue

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