01—Abstract
Summary
Summary of the 10-K/A filed March 4, 2002. Cited figures are marked; the original filing is the authoritative source.
AutoZone's fiscal 2001 (ended August 25, 2001) was a year of sharp earnings contraction driven largely by a one-time restructuring.
Net sales rose 7.5% to $4.82 billiona, with same-store sales up 4% and 166 net new domestic stores added to reach 3,019 locations. However, the company recorded $156.8 million in pretax restructuring and impairment charges (about $0.84 per share after tax), which pushed operating profit down 24% to $387.7 million and diluted EPS down to $1.54 from $2.00. Excluding these charges, pretax income would have been about $443.8 million, so the underlying business remained profitable, though gross margin pressure from insurance and payroll costs and higher interest expense were headwinds.
The charges reflect a strategic review under which management set a 15% after-tax return threshold for all investments. The review led to closing 51 underperforming stores, writing down real estate projects and excess properties, exiting the TruckPro heavy-duty truck parts business (now being sold), and rationalizing inventory. Management also reported a 2001 Robinson-Patman Act lawsuit seeking roughly $1 billionb in damages, which it believes lacks merit and is not likely to be material.
Balance sheet and capital allocation changed meaningfully. Stockholders' equity fell to $866 millionc from $992 million, as the company repurchased $366 million of stock in fiscal 2001 and retired treasury shares. Total debt was roughly flat at $1.23 billion, but its mix shifted toward longer-term notes and term loans, and the debt-to-capital ratio rose to 58.6% from 55.7%.
Operating cash flow was solid at $459 milliond, and the board added a $250 million repurchase authorization after year-end. Investors should weigh the strong store growth and cash generation against thinner margins, a higher leverage profile, and the uncertainty around the pending lawsuit.
02—Key points
Key Highlights
- Net sales grew 7.5% to $4.82 billion; same-store sales increased 4%, and the chain reached 3,019 domestic stores (up 104 net).
- Pretax restructuring and impairment charges of $156.8 million cut operating profit 24% to $387.7 million; diluted EPS fell to $1.54 from $2.00 (about $0.84 per share charge after tax).
- Excluding charges, pretax income would have been about $443.8 million, indicating the core business remained profitable.
- Operating margin declined to 8.0% from 11.4%, and net margin to 3.6% from 6.0%, reflecting the charges plus higher SG&A (31.1% of sales vs. 30.5%) from insurance and payroll costs.
- Shareholder returns: $366 million of stock repurchased in fiscal 2001; a further $250 million authorization was approved after year-end, bringing total authorization to $1.7 billion.
- Stockholders' equity declined to $866 million from $992 million, and debt-to-capital rose to 58.6% from 55.7%, with total debt of $1.23 billion.
- Operating cash flow of $459 million supported capital expenditures of $169 million and share repurchases; the company exited TruckPro and faces a $1 billion Robinson-Patman Act lawsuit it considers without merit.
03—Questions
Frequently Asked Questions
Why did AutoZone's earnings fall so sharply in fiscal 2001?
The decline was primarily due to $156.8 million in pretax restructuring and impairment charges recorded in June 2001 and later in the fiscal year. These included asset writedowns, lease obligation accruals, closing 51 underperforming stores, TruckPro-related charges, and inventory rationalization. Excluding these items, pretax income was about $443.8 million, versus $435.2 million the prior year, so the core business was roughly stable on a profit basis.
What is the company doing to improve returns going forward?
After a strategic review, management set a 15% after-tax return threshold for all current and future investments and reviewed all assets against that hurdle. Actions include closing 51 underperforming stores (to be closed in fiscal 2002), selling the TruckPro heavy-duty truck subsidiary (expected to sign a definitive agreement by calendar year-end 2001), disposing of excess properties within 12 months, and reducing excess inventory.
How is AutoZone funding its growth and share repurchases, and is leverage a concern?
The company relies mainly on internally generated cash (operating cash flow of $459 million) plus borrowings. It opened 107 new U.S. stores and 8 in Mexico in fiscal 2001 and repurchased $366 million of stock. Debt was about $1.23 billion, roughly unchanged, but debt-to-capital rose to 58.6% from 55.7% as equity fell. Management cites its credit rating and extended supplier payment terms as support, and it holds $1.05 billion of revolving credit facilities, though $400 million expires in May 2002.
What is the biggest legal risk disclosed in the filing?
The company is a defendant in a Robinson-Patman Act suit filed in February 2000 by more than 100 aftermarket warehouse distributors and jobbers, which seeks about $1 billion in damages including trebling, plus an injunction on opening new stores. AutoZone calls the suit without merit and plans to vigorously defend it. In October 2001 the court overruled a substantial portion of the defendants' motion to dismiss. Management believes the matter will not likely result in liabilities material to its financial condition or results of operations, though it cannot predict the outcome.
04—Continue