01—Abstract
Summary
Summary of the 10-K filed October 26, 2005. Cited figures are marked; the original filing is the authoritative source.
AutoZone's fiscal 2005 (ended August 27, 2005) showed modest top-line growth with weakening underlying demand.
Net sales rose 1.3% to $5.71 billiona, driven mainly by store growth, while same-store sales declined 2%, and transaction counts fell in both the DIY and commercial businesses. Commercial sales fell 3.0%, offset by growth in ALLDATA and Mexico. The company ended the year with 3,673 stores (3,592 domestic and 81 in Mexico) and opened 175 net new domestic stores.
Profitability was pressured by a $40.3 millionb pre-tax non-cash lease accounting charge and a sharp drop in vendor warranty gains ($1.7 million versus $42.1 million the prior year). Operating profit fell 2.3% to $975.7 million. Net income rose only 0.9% to $571.0 million, but diluted EPS grew 9.5% to $7.18, helped by a 7.9% reduction in diluted share count and a $21.3 million one-time tax benefit tied to planned repatriation of Mexican earnings.
Operating cash flow was $648.1 millionc, and cash flow before share repurchases and debt changes was $432.2 million. AutoZone continued to return capital aggressively, spending $426.9 million on buybacks in fiscal 2005 (after $848.1 million in 2004), with $298.2 million remaining under its $4.4 billion authorization.
Stockholders' equity rebounded to $391.0 milliond from $171.4 million, but the company remains highly leveraged, with total debt of $1.86 billion and interest expense rising to $102.4 million. Key risks include negative same-store sales, pending litigation from aftermarket distributors (Coalition for a Level Playing Field), a $12.0 million California used-oil lawsuit, and increased competition and vendor consolidation.
02—Key points
Key Highlights
- Net sales grew 1.3% to $5.71 billion, but same-store sales fell 2%, with commercial sales down 3.0% and DIY sales up 1.4%.
- Diluted EPS rose 9.5% to $7.18, while net income increased only 0.9% to $571.0 million, reflecting share buybacks and a one-time $21.3 million tax benefit.
- Operating profit declined 2.3% to $975.7 million, pressured by a $40.3 million lease accounting charge and lower vendor warranty gains ($1.7M vs. $42.1M in FY2004).
- Gross margin held steady at 48.9% of net sales, supported by product cost negotiations and mix changes.
- The company repurchased $426.9 million of stock in fiscal 2005, leaving $298.2 million of its $4.4 billion authorization available.
- Total debt was $1.86 billion, with interest expense up to $102.4 million, and credit ratings of BBB+ (S&P) and Baa2 (Moody's, negative outlook).
- Store base expanded to 3,673 locations (175 net new domestic openings), with inventory turnover slowing to 1.81x from 1.87x.
03—Questions
Frequently Asked Questions
Why did EPS grow faster than net income in fiscal 2005?
Net income rose only 0.9% to $571.0 million, but diluted EPS rose 9.5% to $7.18 because the diluted share count fell from 86.4 million to 79.5 million. The company repurchased heavily in fiscal 2004 and 2005. The buybacks added roughly $0.10 to diluted EPS in fiscal 2005.
Are AutoZone's core sales growing?
Not on a same-store basis. Same-store sales declined 2% in fiscal 2005, with transaction counts falling in both DIY and commercial channels. Total sales growth of 1.3% came primarily from new store openings and from ALLDATA and Mexico, which together contributed 0.5 percentage points.
What one-time items affected fiscal 2005 results?
Two items mainly offset each other. A $40.3 million pre-tax non-cash charge related to lease accounting reduced results, while a $21.3 million income tax benefit from the planned repatriation of Mexican earnings and other discrete tax items boosted them. Warranty gains also fell sharply to $1.7 million from $42.1 million, which weighed on gross profit growth.
How leveraged is AutoZone, and what are the financing risks?
Total debt was $1.86 billion at year-end, against stockholders' equity of $391 million. The company has $661.2 million of available revolver capacity and relies on commercial paper, which is sensitive to its credit ratings. A ratings downgrade could raise interest costs or limit access to commercial paper. Covenants include limits on total indebtedness and a minimum fixed charge coverage ratio, and the company reported compliance as of August 27, 2005.
What legal risks does the filing disclose?
AutoZone is a defendant in the Coalition for a Level Playing Field lawsuit, filed in October 2004 by about 240 aftermarket distributors and jobbers. It alleges Robinson-Patman and Sherman Act violations and seeks unspecified treble damages and an injunction limiting new store openings. The company calls the suit without merit and has filed motions to dismiss. Separately, California authorities seek $12.0 million in penalties over used-oil handling and storage practices.
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