01—Abstract
Summary
Summary of the 10-K filed October 27, 2004. Cited figures are marked; the original filing is the authoritative source.
AutoZone's fiscal 2004 (ended August 28, 2004) was a year of solid top-line growth but flat same-store sales and a sharp deterioration in the back half.
Net sales rose 3.3% to $5.637 billiona, driven by new store openings (202 net new domestic stores, 3,483 total stores including 63 in Mexico) and commercial sales growth of 10.5%, while same-store sales were flat for the year after a 3% decline in the fourth quarter. Management attributed the late-year softness to rising gasoline prices and fewer miles driven per vehicle, which reduced transaction counts for both DIY and commercial customers. Profitability improved on the surface.
Net income rose 9.4% to $566.2 millionb and diluted EPS grew 22.8% to $6.56, helped by a 48.9% gross margin (up from 46.1%), $42.1 million in one-time vendor warranty negotiation gains, and the EITF 02-16 accounting reclassification of vendor funding, which added $138.2 million to gross profit but an equal amount to operating expenses. Operating, selling, general and administrative expenses rose to 31.2% of sales from 29.3%, so the gross margin gain was largely reinvested in expenses rather than falling to operating profit. Investors should note that the share count reduction (aggressive buybacks of $848 million in fiscal 2004) contributed roughly $0.20 to EPS.
The balance sheet became considerably more leveraged. Total debt rose to $1.87 billionc from $1.55 billion, and stockholders' equity fell to $171 million from $374 million as cumulative buybacks exceeded retained earnings.
Return on average equity of 208%d reflects this small equity base rather than operating efficiency. Management reports covenant compliance, a BBB+ S&P rating with a negative outlook from Moody's (Baa2), and an expectation to open roughly 200 stores in fiscal 2005.
02—Key points
Key Highlights
- Net sales grew 3.3% to $5.637 billion; same-store sales were flat for the year, with a 3% decline in the fourth quarter as gas prices rose and miles driven fell.
- Diluted EPS rose 22.8% to $6.56, but included $42.1 million in one-time vendor warranty gains and a roughly $0.20 benefit from share repurchases.
- Gross margin expanded to 48.9% from 46.1%, largely reflecting EITF 02-16 vendor funding reclassification ($138.2 million), which was offset by an equal increase in operating expenses.
- Operating SG&A rose to 31.2% of net sales from 29.3%, showing that margin gains did not fully reach operating profit as a percentage of sales.
- Total debt increased to $1.87 billion from $1.55 billion, funding $848 million in share repurchases; stockholders' equity fell to $171 million from $374 million.
- Commercial sales grew 10.5% to $740 million, the fastest-growing segment, while retail DIY sales rose only 1.9%.
- Management plans to open about 200 new stores in fiscal 2005, with capital expenditures expected at historical rates and a $300 million debt issuance planned for the first quarter.
03—Questions
Frequently Asked Questions
Why did AutoZone's same-store sales stall in fiscal 2004?
Same-store sales were up 2% in the first three quarters but declined 3% in the fourth quarter, leaving the full-year figure flat. Management linked the decline to a sudden rise in gasoline prices, which reduced the number of transactions with both DIY and commercial customers. The Federal Highway Administration also reported fewer miles driven per vehicle late in the year. Management said this was the first time it had seen a statistically significant reduction in store-level transactions tied to gas prices.
How much of the EPS growth reflects underlying operating improvement?
Only part of it. Diluted EPS rose $1.22, but the filing identifies several non-operating or accounting contributors: $42.1 million in pre-tax vendor warranty gains (versus $8.7 million the prior year), the EITF 02-16 reclassification that moved vendor funding into gross profit, and about $0.20 from share repurchases that reduced the diluted share count to 86.4 million from 97.0 million. Net income grew 9.4%, which is a more direct measure of earnings growth than the 22.8% EPS increase.
Is AutoZone's balance sheet a concern for investors?
The balance sheet became more leveraged. Long-term debt rose to $1.87 billion, and stockholders' equity fell to $171 million because buybacks ($848 million in fiscal 2004) exceeded retained earnings. Management says it has $1.0 billion of revolving credit facilities, $380.7 million of available capacity, and is in covenant compliance. Its credit ratings are BBB+ (S&P, stable) and Baa2 (Moody's, negative outlook), so a downgrade could raise borrowing costs. Interest expense rose to $92.8 million from $84.8 million.
What are the main risks highlighted in the filing?
The filing cites slowing demand tied to fuel prices and lower vehicle miles driven, intense competition from national chains, mass merchants and repair shops, and rapid competitor store openings near existing locations. It also flags difficulty growing the commercial business against established jobbers and warehouse distributors, vendor consolidation that could raise merchandise costs, and risks from war or terrorism that could disrupt imports and transportation. Labor availability and wage pressure are also noted as risks.
What is AutoZone's capital allocation strategy?
AutoZone is primarily investing in new stores and returning cash through share repurchases. It repurchased 10.2 million shares for $848.1 million in fiscal 2004, and $225 million remains under its $3.9 billion authorization. It does not pay a cash dividend. Capital expenditures were $184.9 million, and the company expects to rely mostly on internal cash flow and available borrowing capacity to fund capex, working capital and buybacks. It also leverages vendor financing through extended payment terms and pay-on-scan arrangements, which kept the accounts payable-to-inventory ratio at 92%.
04—Continue