How strong was AutoZone's underlying profit growth in fiscal 2003?

Reported diluted EPS rose 33.5% to $5.34, and net income rose 20.9% to $517.6M. Excluding non-recurring items, comparable net income grew 26.4% and comparable diluted EPS grew 39.4%. Operating profit increased 19% on a reported basis, and comparable operating profit increased 23.9%. Gross margin and expense leverage both contributed to the improvement.

Why did stockholders' equity drop so sharply?

Equity fell to $373.8M from $689.1M because of large share repurchases totaling $891.1M in fiscal 2003. Buybacks were funded largely by new debt. Return on average equity reached 97%, but the thin equity base means the company's leverage rose materially.

What are the main risks to the company's debt and credit profile?

Long-term debt rose to $1.55B. Moody's changed its outlook to negative after fiscal year-end, while S&P's rating stayed at BBB+. A downgrade could raise interest expense, make commercial paper access more difficult, and push borrowing toward more expensive bank lines. The company has $950M of revolving credit facilities, and it was in compliance with its covenants as of August 30, 2003.

How much of the fiscal 2003 results reflect one-time or accounting effects?

Several items affected results. These include the adoption of EITF 02-16 on vendor funding, which increased operating expenses by $53M and reduced cost of goods sold by $43M, for a net $10M pre-tax negative. There was also a $4.6M gain from property dispositions and a $4.7M TruckPro-related gain. The fiscal 2002 comparison benefited from a 53rd week worth roughly $18.3M of after-tax net income.

What is the outlook for store growth and the legal overhang?

Management expects to open about 195 new stores in fiscal 2004 and to fund most capital needs internally. The Robinson-Patman class action could result in a permanent injunction and damages, though the company has won a jury verdict for 22 original plaintiffs and intends to defend the remaining claims vigorously. The company says it cannot predict the outcome, and it does not currently believe the aggregate of other legal matters is material.

AZO 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed October 30, 2003. Cited figures are marked; the original filing is the authoritative source.

AutoZone (AZO) reported fiscal 2003 (52 weeks ended August 30, 2003) net sales of $5.457 billion^a, up 2.5% from $5.326 billion in the 53-week fiscal 2002, or 4.6% excluding the extra week.

Net income rose 20.9% to $517.6 million^b and diluted EPS rose 33.5% to $5.34. Management attributes the margin expansion to a 1.5-point gross margin improvement (46.1% of sales) and a 0.8-point reduction in SG&A as a percentage of sales (29.3%). Operating profit grew 19% to $917.8 million, and the company cites comparable operating margin of 16.8%, up 2.6 points, excluding non-recurring items.

Several items affected the comparison, including the adoption of EITF 02-16 on vendor funding, a $4.6 million^c property disposal gain, and a $4.7 million TruckPro-related gain. The fiscal 2002 comparison was also flattered by the extra week. The balance sheet and capital structure changed significantly.

Long-term debt rose to $1.55 billion^d from $1.19 billion, funding about $891 million of share repurchases. Stockholders' equity fell to $374 million from $689 million, and return on average equity was 97%. The company does not pay a cash dividend.

Operating cash flow was $698 million, and capital expenditures were $182 million. Management plans to open about 195 stores in fiscal 2004, and it expects to rely mainly on internally generated funds with the balance coming from borrowings. Key risks include a Robinson-Patman Act class action brought by about 225 plaintiffs, with an appeal argued November 5, 2003 and a reinstatement motion pending.

Moody's changed its outlook on AutoZone to negative after fiscal year-end, which could raise borrowing costs if ratings fall further. Competition from national chains, mass merchants, and consolidated vendors also remains a risk factor. Investors should weigh the strong earnings growth and aggressive buybacks against the thin equity base and rising leverage.

02—Key points

Key Highlights

Net sales of $5.457B, up 2.5% reported (4.6% excluding the 53rd week in fiscal 2002); same-store sales up approximately 3%.
Diluted EPS of $5.34, up 33.5% year over year; net income of $517.6M, up 20.9%.
Gross margin expanded 1.5 points to 46.1%; operating expenses fell to 29.3% of sales from 30.1%.
Operating profit of $917.8M, up 19%; comparable operating margin of 16.8% (up 2.6 points excluding non-recurring items).
Repurchased $891.1M of stock in fiscal 2003, leaving stockholders' equity at $374M and long-term debt at $1.55B (up from $1.19B).
Store base grew to 3,219 domestic and 3,268 total stores; plans for about 195 new stores in fiscal 2004.
Pending Robinson-Patman Act litigation from about 225 plaintiffs; appeal oral argument scheduled for November 5, 2003.

03—Questions

Frequently Asked Questions

How strong was AutoZone's underlying profit growth in fiscal 2003?
Reported diluted EPS rose 33.5% to $5.34, and net income rose 20.9% to $517.6M. Excluding non-recurring items, comparable net income grew 26.4% and comparable diluted EPS grew 39.4%. Operating profit increased 19% on a reported basis, and comparable operating profit increased 23.9%. Gross margin and expense leverage both contributed to the improvement.
Why did stockholders' equity drop so sharply?
Equity fell to $373.8M from $689.1M because of large share repurchases totaling $891.1M in fiscal 2003. Buybacks were funded largely by new debt. Return on average equity reached 97%, but the thin equity base means the company's leverage rose materially.
What are the main risks to the company's debt and credit profile?
Long-term debt rose to $1.55B. Moody's changed its outlook to negative after fiscal year-end, while S&P's rating stayed at BBB+. A downgrade could raise interest expense, make commercial paper access more difficult, and push borrowing toward more expensive bank lines. The company has $950M of revolving credit facilities, and it was in compliance with its covenants as of August 30, 2003.
How much of the fiscal 2003 results reflect one-time or accounting effects?
Several items affected results. These include the adoption of EITF 02-16 on vendor funding, which increased operating expenses by $53M and reduced cost of goods sold by $43M, for a net $10M pre-tax negative. There was also a $4.6M gain from property dispositions and a $4.7M TruckPro-related gain. The fiscal 2002 comparison benefited from a 53rd week worth roughly $18.3M of after-tax net income.
What is the outlook for store growth and the legal overhang?
Management expects to open about 195 new stores in fiscal 2004 and to fund most capital needs internally. The Robinson-Patman class action could result in a permanent injunction and damages, though the company has won a jury verdict for 22 original plaintiffs and intends to defend the remaining claims vigorously. The company says it cannot predict the outcome, and it does not currently believe the aggregate of other legal matters is material.

04—Continue

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