01—Abstract
Summary
Summary of the 10-K filed October 25, 2017. Cited figures are marked; the original filing is the authoritative source.
AutoZone (AZO) closed fiscal 2017 (year ended August 26, 2017) with record net income of $1.281 billiona, up 3.2% year over year, on net sales of $10.889 billion, up 2.4%.
Diluted EPS rose 8.3% to $44.07b, but excluding a $0.81 benefit from the new share-based payment accounting standard (ASU 2016-09), adjusted diluted EPS grew 6.3% to $43.26. Growth was driven mainly by 215 new locations and a 0.5% domestic same-store sales increase, while gross margin was essentially flat at 52.7% and operating expense deleveraged to 33.6% of sales on higher wages and occupancy costs. The balance sheet remains structurally levered by design.
Total debt rose to $5.08 billionc, and stockholders' deficit narrowed to $(1.43) billion. AutoZone continued aggressive capital returns, repurchasing $1.07 billion of stock (1.5 million shares) and retaining $823.7 million of authorization. Operating cash flow was $1.571 billion, down from $1.641 billion, mainly due to the timing of accounts payable payments.
Capital expenditures rose to $554 milliond as the company built new distribution centers, and management expects a lower investment rate in fiscal 2018. Key risks flagged include softening same-store sales (only 0.5% in fiscal 2017 versus 2.4% in fiscal 2016), rising wage pressure, an ROIC decline to 29.9% from 31.3% as recent investments dilute returns, and competition from online retailers.
Management also notes an expected future adoption of ASC 842 leases that is likely to materially increase reported assets and liabilities. The company disclosed hurricane-related storm damage in Texas, Florida, Louisiana and Puerto Rico after year-end, with the Puerto Rico impact still under assessment.
02—Key points
Key Highlights
- Record net income of $1.281 billion (+3.2%) and net sales of $10.889 billion (+2.4%), with fiscal 2017 covering 52 weeks.
- Diluted EPS of $44.07 (+8.3%); adjusted diluted EPS of $43.26 (+6.3%) after excluding a $0.81 accounting benefit from ASU 2016-09.
- Domestic same-store sales rose only 0.5%, down from 2.4% in fiscal 2016, with growth mainly driven by 215 new locations (6,029 total at year-end).
- Gross margin held at 52.7% of sales, but SG&A rose to 33.6% of sales from 33.4% on wage pressure and occupancy deleverage.
- Operating cash flow fell to $1.571 billion from $1.641 billion, and free cash flow after capex was roughly $1.0 billion before share repurchases.
- Repurchased $1.07 billion of stock in fiscal 2017 with $823.7 million remaining authorization; total debt increased to $5.08 billion, with an interest coverage ratio of 6.0x and adjusted debt/EBITDAR of 2.6x.
- ROIC declined to 29.9% from 31.3%, which management attributes to higher average debt and recent investments that are currently diluting returns.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, AutoZone Inc kept $0.12.
- Revenue$10.89B100.0%
- Cost of revenue−$5.15B47.3%
- Gross profit$5.74B52.7%
- Operating costs−$3.66B33.6%
- Operating income$2.08B19.1%
- Interest, other & tax−$799.2M7.3%
- Net income$1.28B11.8%
Where FY2017 revenue went
$10.89B- Cost of revenue: $5.15B, 47% of revenue
- SG&A: $3.66B, 34% of revenue
- Net income: $1.28B, 12% of revenue
- Interest, other & tax: $799.2M, 7.3% of revenue
Kept 12% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed October 25, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $10.89B$10.64B | +2.4% |
| Cost of Revenue | $5.15B$5.03B | +2.4% |
| Gross Profit | $5.74B$5.61B | +2.3% |
| SG&A Expenses | $3.66B$3.55B | +3.1% |
| Operating Income | $2.08B$2.06B | +1.0% |
| Interest Expense | $159.33M$150.96M | +5.5% |
| Net Income | $1.28B$1.24B | +3.2% |
| EPS (Basic) | $45.05$41.52 | +8.5% |
| EPS (Diluted) | $44.07$40.70 | +8.3% |
| Shares Outstanding (Basic) | 28.43M29.89M | −4.9% |
| Shares Outstanding (Diluted) | 29.07M30.49M | −4.7% |
05—Questions
Frequently Asked Questions
Why did AutoZone's EPS growth (8.3%) outpace its net income growth (3.2%)?
Share repurchases reduced the diluted share count from 30.5 million to 29.1 million, which boosted per-share results. The adoption of ASU 2016-09 also contributed $0.81 to EPS through a lower effective tax rate, though this benefit is considered non-recurring. Excluding it, adjusted diluted EPS grew 6.3%.
Is AutoZone's slowing same-store sales a concern for investors?
Domestic same-store sales grew just 0.5% in fiscal 2017, compared with 2.4% in fiscal 2016 and 3.8% in fiscal 2015. Growth has increasingly depended on new store openings. Management attributes the slowdown partly to weather and gas prices, and notes that the aging vehicle fleet (11.7 years average age) should support demand over time.
How leveraged is AutoZone, and is the stockholders' deficit a risk?
AutoZone carries about $5.08 billion of debt and a stockholders' deficit of $1.43 billion. The deficit is a result of cumulative share buybacks rather than operating losses. Management targets an adjusted debt-to-EBITDAR ratio of about 2.5x to 2.6x to maintain investment-grade ratings, and the company was in compliance with all covenants at year-end. Its interest coverage ratio was 6.0x against a 2.5x requirement.
What are the main risks to AutoZone's future earnings?
Key risks include slowing demand if miles driven or gas prices shift, intensifying competition from online and multi-channel retailers, and wage inflation in its largest expense category. Other factors include supply chain costs tied to its inventory initiatives, a higher cost structure than some competitors, and the potential for a credit rating downgrade that would raise borrowing costs. The company also faces ongoing environmental and wage-and-hour legal matters, though management does not expect them to be material.
06—Continue