01—Abstract
Summary
Summary of the 10-K filed October 22, 2012. Cited figures are marked; the original filing is the authoritative source.
AutoZone's fiscal 2012 (year ended August 25, 2012) was a strong year by its own measures.
Net sales rose 6.6% to $8.604 billiona, driven by a 3.9% increase in domestic same-store sales and $214.2 million from new stores. Operating profit grew 8.9% to $1.629 billion, and net income rose 9.6% to a record $930.4 million. Diluted EPS increased 20.6% to $23.48, helped by aggressive share buybacks: the company repurchased $1.363 billion of stock, reducing diluted shares from 43.6 million to 39.6 million.
Gross margin improved 50 basis points to 51.5%, reflecting better merchandise margins and lower shrink, while SG&A held roughly flat as a percentage of sales at 32.6%. The balance sheet remains highly levered by design. Stockholders' deficit widened to $1.548 billion, and total debt increased to $3.77 billionb.
Management is targeting an adjusted debt-to-EBITDAR ratio of 2.5x to preserve investment-grade ratings, and the company reported 4.58x interest coverage against a 2.50x covenant. Operating cash flow was $1.224 billionc, slightly below the prior year, mainly because of inventory growth. The company continued expanding, opening 193 net new stores (5,006 total, including 321 in Mexico), and it expects higher capital investment in fiscal 2013.
Management also increased the cumulative buyback authorization to $12.65 billiond and paid no dividend. Key risks include a dependence on aging-vehicle demand, competitive pressure from both DIY and commercial rivals, sensitivity to gasoline prices and macroeconomic conditions, and reliance on vendor payment terms that support the high accounts payable-to-inventory ratio of 111%. The company also faces a New Jersey groundwater remediation matter, though management does not expect it to be material.
02—Key points
Key Highlights
- Record net income of $930.4 million (+9.6%) and diluted EPS of $23.48 (+20.6%), with the EPS growth outpacing net income because of a 9% reduction in diluted share count from buybacks.
- Net sales reached $8.60 billion (+6.6%), led by a 3.9% domestic same-store sales increase and 193 net new stores, bringing the total to 5,006.
- Gross margin expanded to 51.5% from 51.0%, driven by a 19 basis point gain in merchandise margins and a 17 basis point reduction in shrink.
- Stockholders' deficit deepened to $(1.55) billion as the company returned capital through $1.36 billion in buybacks; the company pays no dividend.
- Total debt rose to $3.77 billion, and the adjusted debt-to-EBITDAR ratio held at 2.5x, consistent with the company's investment-grade rating target.
- Operating cash flow was $1.22 billion, down slightly from $1.29 billion, as inventory growth outpaced payables; free cash flow after capex was about $846 million.
- Management expects to increase investment in fiscal 2013, and it raised the cumulative repurchase authorization to $12.65 billion after year-end.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, AutoZone Inc kept $0.11.
- Revenue$8.60B100.0%
- Cost of revenue−$4.17B48.5%
- Gross profit$4.43B51.5%
- Operating costs−$2.80B32.6%
- Operating income$1.63B18.9%
- Interest, other & tax−$698.5M8.1%
- Net income$930.4M10.8%
Where FY2012 revenue went
$8.60B- Cost of revenue: $4.17B, 48% of revenue
- SG&A: $2.80B, 33% of revenue
- Net income: $930.4M, 11% of revenue
- Interest, other & tax: $698.5M, 8.1% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed October 22, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $8.60B$8.07B | +6.6% |
| Cost of Revenue | $4.17B$3.95B | +5.5% |
| Gross Profit | $4.43B$4.12B | +7.6% |
| SG&A Expenses | $2.80B$2.62B | +6.8% |
| Operating Expenses | $2.80B$2.62B | +6.8% |
| Operating Income | $1.63B$1.49B | +9.0% |
| Interest Expense | $178.55M-$173.67M | +202.8% |
| Net Income | $930.37M$848.97M | +9.6% |
| EPS (Basic) | $24.04$19.91 | +20.7% |
| EPS (Diluted) | $23.48$19.47 | +20.6% |
| Shares Outstanding (Basic) | 38.70M42.63M | −9.2% |
| Shares Outstanding (Diluted) | 39.63M43.60M | −9.1% |
05—Questions
Frequently Asked Questions
Why did diluted EPS grow faster than net income?
Net income rose 9.6%, but diluted EPS rose 20.6% because the diluted share count fell from 43.6 million to 39.6 million. AutoZone repurchased 3.8 million shares for $1.36 billion during fiscal 2012. Management estimated buybacks added roughly $0.96 to fiscal 2012 diluted EPS.
Is AutoZone's negative stockholders' equity a concern?
The deficit is a deliberate result of the company's strategy. Repeated buybacks and the retirement of treasury shares, which reduce retained earnings, have pushed equity negative. Management manages leverage through an adjusted debt-to-EBITDAR target of about 2.5x, which keeps its investment-grade ratings intact. Interest coverage was 4.58x against a 2.50x covenant, so near-term debt-service capacity appears comfortable. Investors should still watch whether leverage rises faster than EBITDAR.
How dependent is AutoZone on vendor financing?
The company operates with negative working capital, and its accounts payable equals 111% of inventory. Many vendors give extended payment terms, and some factor their receivables through financial institutions. A change in vendor willingness or in the financing available to vendors could raise working capital needs. Management has said its ability to keep leveraging inventory purchases could be limited by vendor factoring capacity.
What drives long-term demand for AutoZone's products?
Management points to two indicators: miles driven and the number of vehicles seven years old or older. Older vehicles are typically out of warranty and need more maintenance and repair. The average age of vehicles on the road rose to 10.8 years in December 2011 from 10.6 years a year earlier. Weak new-car sales since 2008 have helped support this trend, although a rebound in new-car sales or a longer vehicle-life cycle from better technology could reduce it over time.
Are there material legal or regulatory exposures?
The most specific matter is a groundwater contamination issue at a New Jersey store site acquired in 2004. New Jersey regulators intend to assert joint and several liability for downgradient vapor intrusion impacts, and AutoZone plans to contest that claim. The company may be reimbursed for up to 75% of qualified remediation costs. Management does not believe the matter will be material. The company also faces class-action wage and hour lawsuits, which management does not believe will be material either.
06—Continue