01—Abstract
Summary
Summary of the 10-K filed October 25, 2006. Cited figures are marked; the original filing is the authoritative source.
AutoZone (AZO) reported fiscal 2006 (52 weeks ended August 26, 2006) net sales of $5.948 billiona, up 4.2% from $5.711 billion, driven mainly by new store openings.
Same-store sales rose only 0.4%, and commercial sales fell 1.1% while retail DIY sales grew 4.9%. Net income declined 0.3% to $569.3 millionb, but diluted EPS rose 4.5% to $7.50, helped by a roughly 4% reduction in diluted share count from $578 million of buybacks. Fiscal 2006 absorbed a $17.4 million pre-tax share-based compensation expense from adopting SFAS 123(R), which lowered diluted EPS by $0.14.
Operating profit grew 3.5% to $1.01 billion, and operating cash flow rose sharply to $822.7 millionc from $648.1 million. Balance sheet and capital allocation remain central to the story. Stockholders' equity was only $469.5 million, a result of cumulative repurchases of about $4.7 billion since 1998, and return on average equity is not meaningful for investors to compare against peers.
Total debt was roughly flat at $1.86 billiond, with a 5.5% weighted average borrowing rate and BBB+/Baa2 credit ratings. Inventory turnover declined to 1.7x from 1.8x, though the accounts payable to inventory ratio held at 92%, showing that vendors continue to finance inventory growth. The company operated 3,871 stores (3,771 domestic and 100 in Mexico) and opened 185 net new domestic stores, though same-store sales growth and the slowing commercial business are the key watch items.
Risks disclosed include competition from national chains and mass merchants, consolidation among vendors and competitors, energy and fuel price exposure, and pending litigation. The most notable legal matters are a Robinson-Patman Act suit by aftermarket distributors (the company calls it without merit) and a California used-oil handling suit seeking $12.0 million in penalties. Management reported effective internal controls, and Ernst & Young issued an unqualified opinion.
02—Key points
Key Highlights
- Net sales rose 4.2% to $5.948 billion, driven primarily by new store growth (3,871 total stores at year-end, up from 3,673), while same-store sales increased only 0.4%.
- Diluted EPS grew 4.5% to $7.50 despite flat net income ($569.3 million, down 0.3%), reflecting a roughly 4.5% reduction in weighted diluted shares from aggressive buybacks.
- Share repurchases totaled $578.1 million in fiscal 2006 (6.2 million shares), with $220 million remaining under the $4.9 billion authorization.
- Operating cash flow increased 27% to $822.7 million, and cash flow before share repurchases and debt changes rose to $599.5 million from $432.2 million.
- Fiscal 2006 includes a $17.4 million pre-tax share-based compensation charge from adopting SFAS 123(R), which reduced diluted EPS by $0.14.
- Commercial (DIFM) sales declined 1.1% while retail DIY sales grew 4.9%, and inventory turnover slipped to 1.7x from 1.8x, a potential margin and efficiency watch point.
- Shareholders' equity is only $469.5 million against $1.86 billion of debt, reflecting cumulative buybacks of $4.7 billion since 1998; the company carries BBB+/Baa2 credit ratings with a stable outlook.
03—Questions
Frequently Asked Questions
How did AutoZone perform in fiscal 2006 compared with fiscal 2005?
Net sales grew 4.2% to $5.948 billion, operating profit rose 3.5% to $1.010 billion, and net income was essentially flat at $569.3 million. Diluted EPS increased 4.5% to $7.50, mainly because of share repurchases that reduced the diluted share count. Growth came primarily from new stores rather than same-store sales, which rose only 0.4%.
Why did diluted EPS rise while net income fell?
AutoZone repurchased 6.2 million shares for $578.1 million during fiscal 2006, which lowered the weighted average diluted share count to 75.9 million from 79.5 million. The company estimates that buybacks added about $0.09 to fiscal 2006 diluted EPS. Net income was slightly lower because the company absorbed a $17.4 million share-based compensation expense and a higher effective tax rate of 36.9%.
What are the main risks to AutoZone's growth?
Key risks include intensifying competition from national and regional chains as well as mass merchants, rapidly opening competitor locations near existing stores, and slowing growth in the commercial business, where sales fell 1.1%. Other risks include consolidation among vendors and competitors, dependence on consumer driving patterns and vehicle age, rising energy prices, and a shortage of qualified employees. Pending litigation includes a Robinson-Patman Act suit by aftermarket distributors and a California suit seeking $12.0 million in penalties over used-oil handling.
How is AutoZone financing its growth and buybacks?
Operating cash flow of $822.7 million covered most of the $263.6 million in capital expenditures and the $578.1 million in share repurchases, with the balance funded through modest debt activity. Vendors finance much of the inventory investment, as shown by an accounts payable-to-inventory ratio of 92%. The company holds $1.0 billion in revolving credit facilities, with $746.8 million available at year-end, and it issued $200 million of 6.95% senior notes due 2016 during the year.
Is AutoZone's balance sheet a concern for investors?
Total debt is about $1.86 billion, with a weighted average borrowing rate of 5.5%, and stockholders' equity is just $469.5 million. The low equity reflects a long history of buybacks funded partly by debt and operating cash flow, which the company accepts as part of its capital structure. Investors should weigh this leverage against the company's consistent cash generation and its BBB+ and Baa2 credit ratings, both with a stable outlook, which the company says allow it to refinance maturities.
04—Continue