01—Abstract
Summary
Summary of the 10-K filed October 24, 2016. Cited figures are marked; the original filing is the authoritative source.
AutoZone's fiscal 2016 (year ended August 27, 2016) was a strong year, with record net income of $1.241 billiona, up 7.0% from $1.160 billion, and net sales of $10.636 billion, up 4.4% from $10.187 billion.
Diluted EPS rose 13.0% to $40.70b, helped by aggressive share repurchases of $1.452 billion (about 1.9 million shares), which contributed roughly $1.17 of the EPS increase. Domestic same-store sales grew 2.4%, and the company added 205 net new locations, ending the year at 5,814 total locations across the U.S., Mexico, Brazil and IMC branches. Gross margin improved modestly to 52.7% of sales from 52.3%, driven by lower acquisition costs, partially offset by higher supply chain costs tied to inventory initiatives.
Operating, selling, general and administrative expenses rose to 33.4% of sales from 33.1%, mainly due to higher store payroll. Operating cash flow reached $1.577 billionc, and the company funded its growth and buybacks with a mix of internally generated cash and incremental debt, with total debt rising to $4.92 billion. Stockholders' deficit widened to $1.79 billion, a structural feature of AutoZone's leveraged buyback strategy rather than a sign of distress.
Investors should note the company pays no dividend, the fourth quarter (16 weeks) is seasonally the largest, and key risks include competition, rising energy prices, consumer debt levels, supplier concentration (one vendor supplied about 10% of purchases) and a 2016 inventory build that required higher supply chain spending. Management expects to invest at an increased rate in fiscal 2017, and the board increased the buyback authorization by $750 million to $17.9 billiond in September 2016.
02—Key points
Key Highlights
- Record net income of $1.241 billion (+7.0%) and diluted EPS of $40.70 (+13.0%), with buybacks contributing about $1.17 to EPS.
- Net sales of $10.636 billion (+4.4%), driven by 2.4% domestic same-store sales growth, $177.0 million from new stores, and 7.1% commercial sales growth.
- Gross margin expanded to 52.7% from 52.3%, reflecting lower acquisition costs, partly offset by higher supply chain costs.
- Operating cash flow of $1.577 billion, up from $1.525 billion, while capital expenditures totaled $488.8 million.
- Share repurchases of $1.452 billion in fiscal 2016; the authorization was raised to $17.9 billion in September 2016, leaving $847.7 million available after that increase.
- Total debt rose to $4.92 billion; the company maintains investment-grade ratings, an adjusted debt-to-EBITDAR ratio of 2.5x, and an interest coverage ratio of 5.5x against a 2.5x covenant.
- Store footprint expanded to 5,814 locations with 205 new openings, and the company is planning a faster investment pace in fiscal 2017.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, AutoZone Inc kept $0.12.
- Revenue$10.64B100.0%
- Cost of revenue−$5.03B47.3%
- Gross profit$5.61B52.7%
- Operating costs−$3.55B33.4%
- Operating income$2.06B19.4%
- Interest, other & tax−$819.4M7.7%
- Net income$1.24B11.7%
Where FY2016 revenue went
$10.64B- Cost of revenue: $5.03B, 47% of revenue
- SG&A: $3.55B, 33% of revenue
- Net income: $1.24B, 12% of revenue
- Interest, other & tax: $819.4M, 7.7% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed October 24, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $10.64B$10.19B | +4.4% |
| Cost of Revenue | $5.03B$4.86B | +3.4% |
| Gross Profit | $5.61B$5.33B | +5.3% |
| SG&A Expenses | $3.55B$3.37B | +5.2% |
| Operating Income | $2.06B$1.95B | +5.5% |
| Interest Expense | $150.96M$153.01M | −1.3% |
| Net Income | $1.24B$1.16B | +7.0% |
| EPS (Basic) | $41.52$36.76 | +12.9% |
| EPS (Diluted) | $40.70$36.03 | +13.0% |
| Shares Outstanding (Basic) | 29.89M31.56M | −5.3% |
| Shares Outstanding (Diluted) | 30.49M32.21M | −5.3% |
05—Questions
Frequently Asked Questions
Why does AutoZone have a stockholders' deficit, and is it a concern?
The deficit ($1.79 billion at August 27, 2016) results from cumulative share repurchases of about $16.8 billion since 1998, which are funded largely by operating cash flow and debt. Management targets a debt level consistent with investment-grade ratings rather than an equity balance, so the deficit reflects capital-allocation policy rather than operating losses. Investors should still watch debt growth relative to EBITDAR.
How much of the EPS growth came from share buybacks rather than operations?
Management estimated buybacks added about $1.17 to fiscal 2016 diluted EPS. Net income grew 7.0% while diluted EPS grew 13.0%, meaning roughly half of the EPS growth came from a lower share count (about 30.5 million diluted shares versus 32.2 million in fiscal 2015).
What are the main risks to AutoZone's sales and margins?
Key risks include declining demand from lower vehicle miles driven or rising gas prices, intense competition from national chains, online retailers and mass merchants, consolidation among competitors, reliance on vendors and imports (about 10% of purchases were directly imported), and the possibility of losing the high accounts payable-to-inventory benefit (112.8% in fiscal 2016) if vendors restrict extended payment terms. Concentration risk is also present, as one vendor supplied about 10% of purchases.
Is the fourth quarter a disproportionate share of AutoZone's results?
Yes. The fourth quarter is 16 weeks long compared with 12 weeks for the other quarters and falls in the seasonally strong spring and summer months. In fiscal 2016 it generated 32.0% of annual sales and 34.4% of net income, so quarterly comparisons should be interpreted with this calendar structure in mind.
Does AutoZone pay dividends, and how is capital being returned?
AutoZone does not pay a dividend, and its ability to do so is limited under Nevada law. Capital is returned exclusively through share repurchases, which totaled $1.452 billion in fiscal 2016. The company expects to increase its investment in locations, supply chain and technology in fiscal 2017, so repurchases will compete with that spending for funding.
06—Continue