01—Abstract
Summary
Summary of the 10-K filed October 27, 2008. Cited figures are marked; the original filing is the authoritative source.
AutoZone (AZO) closed fiscal 2008 (53 weeks ended August 30, 2008) with record net income of $641.6 milliona, up 7.7%, and diluted EPS of $10.04, up 17.8%, helped by a roughly 4% reduction in diluted share count from buybacks.
Net sales rose 5.7% to $6.52 billionb, driven by new stores (4,240 total at year-end, including 148 in Mexico), a 1.9-point contribution from the extra week, and domestic same-store sales growth of just 0.4%. Excluding the 53rd week, net income grew 5.1% to $625.8 million and diluted EPS rose 14.9% to $9.80. Management described a challenging macro environment, citing higher gas prices, the credit crisis and rising unemployment, and said customers are more cautious.
Commercial (DIFM) sales grew 6.8% while domestic retail grew 4.5%, though management said it remains focused on strengthening the retail business. Balance sheet leverage increased meaningfully. Total debt rose to $2.25 billionc from $1.94 billion after the August 2008 issuance of $500 million 6.50% notes due 2014 and $250 million 7.125% notes due 2018, which refinanced commercial paper and the July 2008 maturity.
Stockholders' equity fell to $229.7 milliond from $403.2 million because of $849 million in share repurchases, and return on average equity is now a very high figure, reflecting the thin equity base. Management continued aggressive buybacks, raised the authorization to $6.4 billion (and to $6.9 billion in September 2008), and has no plans to pay a cash dividend. Credit ratings are BBB (S&P), Baa2 (Moody's) and BBB (Fitch), all with stable outlooks.
The company also agreed with ESL Investments to target an adjusted debt/EBITDAR ratio of 2.5x, up from 2.1x, by February 2009, which signals tolerance for further leverage. Key risks include a pending Robinson-Patman Act class action brought by aftermarket distributors (which the company calls without merit), exposure to fuel prices and distribution costs, vendor and competitor consolidation, tightening credit markets that could limit vendor financing of inventory, and possible credit rating downgrades if leverage rises further. Investors should weigh strong cash generation (operating cash flow of $921 million) and disciplined store growth against a more fragile consumer backdrop and a rapidly shrinking equity base.
02—Key points
Key Highlights
- Record fiscal 2008 net income of $641.6M (+7.7%) and diluted EPS of $10.04 (+17.8%); excluding the 53rd week, EPS was $9.80 (+14.9%)
- Net sales of $6.52B (+5.7%), with the 53rd week adding about 1.9 points; domestic same-store sales rose only 0.4%
- Commercial (DIFM) sales grew 6.8% versus 4.5% for domestic retail, while management emphasized the need to strengthen retail
- Operating cash flow of $921.1M and cash flow before buybacks and debt changes of $691.5M
- Total debt rose to $2.25B after issuing $750M of senior notes in August 2008, and stockholders' equity fell to $229.7M from $403.2M after $849M of buybacks
- Store base reached 4,240 (4,092 domestic, 148 Mexico), with 159 net new domestic stores and a 6% increase in domestic square footage
- Buyback authorization raised to $6.4B (later $6.9B in September 2008), with no cash dividend; the ESL agreement targets 2.5x adjusted debt/EBITDAR by February 2009
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, AutoZone Inc kept $0.10.
- Revenue$6.52B100.0%
- Cost of revenue−$3.25B49.9%
- Gross profit$3.27B50.1%
- Operating costs−$2.14B32.9%
- Operating income$1.12B17.2%
- Interest, other & tax−$482.5M7.4%
- Net income$641.6M9.8%
Where FY2008 revenue went
$6.52B- Cost of revenue: $3.25B, 50% of revenue
- Operating costs: $2.14B, 33% of revenue
- Net income: $641.6M, 9.8% of revenue
- Interest, other & tax: $482.5M, 7.4% of revenue
Kept 9.8% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed October 27, 2008Financial Statements
| Revenue | $6.52B |
| Cost of Revenue | $3.25B |
| Gross Profit | $3.27B |
| Operating Expenses | $2.14B |
| Operating Income | $1.12B |
| Interest Expense | $121.84M |
| Net Income | $641.61M |
| EPS (Basic) | $10.14 |
| EPS (Diluted) | $10.04 |
| Shares Outstanding (Basic) | 63.30M |
| Shares Outstanding (Diluted) | 63.88M |
05—Questions
Frequently Asked Questions
How did AutoZone perform financially in fiscal 2008?
AutoZone reported record net income of $641.6 million and diluted EPS of $10.04, up 17.8% from $8.53. Net sales were $6.52 billion, up 5.7%. About 1.9 points of the sales growth came from the 53rd week, and excluding that week, net income still grew 5.1% to $625.8 million.
How much of the EPS growth came from share buybacks rather than operations?
Management estimated that fiscal 2008 buybacks added about $0.29 to diluted EPS. Diluted share count fell from roughly 69.8 million to 63.9 million, so a meaningful share of the EPS gain came from repurchases rather than earnings growth alone. Net income rose 7.7%, compared with the 17.8% EPS increase.
Is AutoZone's balance sheet getting riskier?
Yes. Total debt rose to $2.25 billion from $1.94 billion, and stockholders' equity dropped to $229.7 million from $403.2 million because of large buybacks. The company remains investment grade (BBB/Baa2/BBB) with stable outlooks, but it agreed to raise its adjusted debt/EBITDAR target to 2.5x from 2.1x, which indicates willingness to take on more leverage.
What are the main risks to AutoZone's business?
Key risks include a slowdown in demand from fewer miles driven and higher gas prices, weak consumer credit, competition from national chains and mass merchants, vendor and competitor consolidation, and tighter credit markets that could limit vendor financing. The company also faces a Robinson-Patman Act lawsuit from aftermarket distributors, which it believes lacks merit.
06—Continue