01—Abstract
Summary
Summary of the 10-K filed October 26, 2009. Cited figures are marked; the original filing is the authoritative source.
AutoZone (AZO) closed fiscal 2009 (52 weeks ended August 29, 2009) with record net income of $657.0 milliona, up 2.4%, and diluted EPS of $11.73, up 16.8%, helped by a 9.3 million-share buyback costing $1.3 billion.
Net sales rose 4.5% to $6.817 billionb (6.6% excluding the 53rd week in fiscal 2008), driven by a 4.4% increase in domestic same-store sales. Operating profit grew 4.6% to $1.176 billion, with gross margin steady at 50.1% and operating expenses at 32.9% of sales. Management attributed the sales improvement partly to the credit crisis and higher unemployment, which pushed consumers to keep and maintain older vehicles.
Miles driven and the population of vehicles seven years old or older are the company's key demand indicators. The balance sheet became more leveraged. Total debt rose to $2.73 billionc from $2.25 billion, after a $500 million 5.75% note issuance in July 2009 and a $300 million term loan prepayment.
Stockholders' equity turned negative at $(433) million, down from $230 milliond, because of aggressive buybacks, cumulative $7.6 billion repurchased since 1998, and pension and currency losses in other comprehensive income. Management reports an adjusted debt/EBITDAR ratio of 2.5x and an interest coverage ratio of 4.19x against a 2.50x covenant, and the company reports compliance with covenants. Working capital is negative at $(145) million, which reflects vendor financing of inventory through an accounts payable to inventory ratio of 96%.
Risks flagged in the filing include tightening credit markets, a credit downgrade trigger, competition from national chains and mass merchants, and the concentration of voting control with ESL Investments, which owns about 40% of the stock. A Robinson-Patman Act class action brought by aftermarket distributors seeks unspecified damages, and the company says the suit is without merit.
Store count reached 4,417 (4,229 domestic and 188 in Mexico) with 180 new openings in fiscal 2009. Management plans to continue store growth, to increase store property ownership, and to keep returning capital through share repurchases.
02—Key points
Key Highlights
- Record fiscal 2009 net income of $657.0 million and diluted EPS of $11.73, up 16.8% year over year, aided by a 7.8% reduction in diluted share count from buybacks
- Net sales of $6.817 billion, up 4.5% reported and 6.6% excluding the 53rd week, with domestic same-store sales up 4.4%
- Gross margin held at 50.1% and operating profit rose 4.6% to $1.176 billion
- Total debt rose to $2.73 billion from $2.25 billion; adjusted debt/EBITDAR was 2.5x, with interest coverage of 4.19x vs. a 2.50x covenant minimum
- Stockholders' equity turned negative at $(433) million after $1.3 billion in fiscal 2009 buybacks and $7.6 billion cumulative since 1998
- Store base expanded to 4,417 stores (188 in Mexico) with 180 new openings; commercial program operates from 2,303 stores
- Key risks: credit market access and ratings, ESL's ~40% voting stake, competition, and a pending Robinson-Patman class action with no estimated loss range
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, AutoZone Inc kept $0.10.
- Revenue$6.82B100.0%
- Cost of revenue−$3.40B49.9%
- Gross profit$3.42B50.1%
- Operating costs−$2.24B32.9%
- Operating income$1.18B17.3%
- Interest, other & tax−$519.0M7.6%
- Net income$657.0M9.6%
Where FY2009 revenue went
$6.82B- Cost of revenue: $3.40B, 50% of revenue
- SG&A: $2.24B, 33% of revenue
- Net income: $657.0M, 9.6% of revenue
- Interest, other & tax: $519.0M, 7.6% of revenue
Kept 9.6% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed October 26, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $6.82B$6.52B | +4.5% |
| Cost of Revenue | $3.40B$3.25B | +4.5% |
| Gross Profit | $3.42B$3.27B | +4.5% |
| SG&A Expenses | $2.24B— | — |
| Operating Expenses | $2.24B$2.14B | +4.5% |
| Operating Income | $1.18B$1.12B | +4.6% |
| Interest Expense | $147.50M$121.84M | +21.1% |
| Net Income | $657.05M$641.61M | +2.4% |
| EPS (Basic) | $11.89$10.14 | +17.3% |
| EPS (Diluted) | $11.73$10.04 | +16.8% |
| Shares Outstanding (Basic) | 55.28M63.30M | −12.7% |
| Shares Outstanding (Diluted) | 55.99M63.88M | −12.3% |
05—Questions
Frequently Asked Questions
Why did AutoZone's net income grow only 2.4% while diluted EPS rose 16.8%?
Fiscal 2008 was a 53-week year, and buybacks cut the weighted diluted share count from about 63.9 million to 56.0 million. Net income rose 2.4% to $657.0 million, but per-share earnings grew faster because the share count fell. Excluding the extra week in the prior year, net income grew 5.0% and diluted EPS grew 19.7%.
Is AutoZone's negative stockholders' equity a concern for investors?
Negative equity of $(433) million reflects deliberate capital return rather than operating losses, since the company still earns about $657 million a year. It results from repurchasing $1.3 billion of stock in fiscal 2009, pension and currency losses in other comprehensive income, and cumulative buybacks. Investors should still watch leverage, because debt increased to $2.73 billion and the company depends on investment-grade ratings to keep commercial paper and bond market access.
How much debt does AutoZone carry and when does it come due?
Total debt was $2.73 billion at August 29, 2009, including $277.6 million of commercial paper and $199.3 million of 4.75% notes due November 2010. Senior notes make up most of the balance, with maturities in 2012, 2013, 2014, 2015, 2016, and 2018. Management says it can refinance commercial paper on a long-term basis through its $800 million revolving credit facility, which had $410.5 million of available capacity. Credit ratings are BBB (S&P), Baa2 (Moody's), and BBB (Fitch), all with stable outlooks.
What drove the increase in same-store sales and what are the risks to continued growth?
Same-store sales rose 4.4%, driven mainly by higher transaction counts. Management attributes this to consumers keeping older vehicles longer during the recession, with the seven-year-old-plus vehicle count rising. Miles driven declined for 16 consecutive months before recovering in mid-2009, and gas prices fell from a 2008 peak near $4 per gallon to about $2.61 by year end. Risks include a reversal in these trends, job losses, competition, and reduced vendor credit availability that could pressure the working capital model.
Does ESL Investments exert meaningful control over AutoZone?
ESL Investments owned about 40% of outstanding shares as of October 19, 2009, giving it substantial influence over stockholder votes, including director elections and change-of-control transactions. A June 2008 agreement requires ESL to vote shares above 40% in proportion to other shareholders, with that threshold dropping to 37.5% after the 2009 annual meeting. Two ESL-identified directors serve on the board, and one of them is President and COO of ESL Investments.
06—Continue