01—Abstract
Summary
Summary of the 10-K filed October 24, 2018. Cited figures are marked; the original filing is the authoritative source.
AutoZone (AZO) closed fiscal 2018 (year ended August 25, 2018) with record net income of $1.338 billiona, up 4.4%, and net sales of $11.221 billion, up 3.1%.
Domestic same-store sales rose 1.8%, and both retail and commercial sales grew. Diluted EPS rose 10.7% to $48.77b, helped by a lower effective tax rate of 18.3% (versus 33.5% in fiscal 2017) from the Tax Cuts and Jobs Act and share repurchases. Reported operating profit fell 13% to $1.811 billion because of $193.2 million in asset impairments (IMC and AutoAnything) and $130.3 million in pension termination charges.
Excluding those items, the business was healthier than the headline operating profit suggests. Gross margin expanded 53 basis points to 53.2%c. Cash generation was strong.
Operating cash flow rose to $2.08 billiond from $1.57 billion, driven largely by a $320 million increase in accounts payable and accrued expenses. Cash flow before share repurchases and changes in debt was $1.60 billion, and the company bought back $1.59 billion of stock (2.4 million shares). Remaining authorization stood at $1.22 billion after a $1.25 billion increase announced September 26, 2018.
Stockholders' deficit widened to $1.52 billion, reflecting the company's leveraged recapitalization-style buybacks, which AutoZone pursues while keeping its investment-grade rating (adjusted debt/EBITDAR of 2.5x). Growth is driven by store expansion and commercial programs. AutoZone ended the year with 6,202 stores, including 201 new openings, and 4,741 domestic stores offering commercial programs.
Management flagged risks including the aging vehicle fleet (average age 11.7 years), rising wage pressure, competition from online retailers, and dependence on vendor-extended payment terms. The 111.8% accounts payable-to-inventory ratio is a key structural feature of the model.
02—Key points
Key Highlights
- Record net income of $1.338B (+4.4%) and diluted EPS of $48.77 (+10.7%), with EPS aided by share buybacks and a lower tax rate (18.3% vs. 33.5%).
- Net sales grew 3.1% to $11.221B; domestic same-store sales increased 1.8%, and commercial sales rose 7.3%.
- Reported operating profit fell 13% to $1.811B due to $193.2M in impairments and $130.3M in pension termination charges; gross margin improved 53 bps to 53.2%.
- Operating cash flow rose 32% to $2.08B, supported by higher payables; cash flow before buybacks and debt changes was $1.60B.
- Returned $1.59B to shareholders via buybacks (2.4M shares) with no dividend; $1.22B of repurchase authorization remained after the September 2018 increase.
- Store base reached 6,202 (5,618 U.S., 564 Mexico, 20 Brazil) after 201 openings; 26 IMC branches were divested in April 2018.
- Stockholders' deficit widened to $(1.52)B, a consequence of the buyback strategy, while leverage held at 2.5x adjusted debt/EBITDAR and investment-grade ratings were maintained.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, AutoZone Inc kept $0.12.
- Revenue$11.22B100.0%
- Cost of revenue−$5.25B46.8%
- Gross profit$5.97B53.2%
- Operating costs−$4.16B37.1%
- Operating income$1.81B16.1%
- Interest, other & tax−$473.3M4.2%
- Net income$1.34B11.9%
Where FY2018 revenue went
$11.22B- Cost of revenue: $5.25B, 47% of revenue
- SG&A: $4.16B, 37% of revenue
- Net income: $1.34B, 12% of revenue
- Interest, other & tax: $473.3M, 4.2% of revenue
Kept 12% as net incomeNet income $1.34B · 12%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed October 24, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $11.22B$10.89B | +3.1% |
| Cost of Revenue | $5.25B$5.15B | +1.9% |
| Gross Profit | $5.97B$5.74B | +4.1% |
| SG&A Expenses | $4.16B$3.66B | +13.8% |
| Operating Income | $1.81B$2.08B | −12.9% |
| Interest Expense | $181.67M$159.33M | +14.0% |
| Net Income | $1.34B$1.28B | +4.4% |
| EPS (Basic) | $49.59$45.05 | +10.1% |
| EPS (Diluted) | $48.77$44.07 | +10.7% |
| Shares Outstanding (Basic) | 26.97M28.43M | −5.1% |
| Shares Outstanding (Diluted) | 27.42M29.07M | −5.6% |
05—Questions
Frequently Asked Questions
Why did operating profit decline despite higher sales and gross profit?
Operating SG&A rose to $4.163B from $3.660B, mainly because of two non-recurring charges: $193.2M of impairments tied to the IMC and AutoAnything divestitures (recorded in Q2) and $130.3M of non-cash pension termination charges (recorded in Q4). Together they account for roughly 290 bps of SG&A deleverage. Excluding them, operating profit would have grown modestly.
How much of the EPS growth came from tax reform versus underlying performance?
Tax reform lowered the effective tax rate substantially. The $131.5M net provisional benefit, $119.2M from the blended federal rate, and $31.3M of stock option excess tax benefits together drove the rate down to 18.3%. Net income grew only 4.4% while diluted EPS grew 10.7%, so buybacks (which cut the diluted share count from 29.1M to 27.4M) added roughly $1.36 per share. Tax items are partly one-time and the company says the transition-tax accounting is still provisional, so investors should not extrapolate the lower rate.
Is the stockholders' deficit a concern for investors?
The deficit of $1.52B is a product of cumulative buybacks exceeding retained earnings, not operating losses. Management targets a specific adjusted debt/EBITDAR ratio (2.5x) to preserve investment-grade ratings, and it has cited the company's $2.0B revolver with $1.997B available as liquidity support. The main risk is that a ratings downgrade could raise borrowing costs and limit repurchase capacity. Debt is $5.0B, with $1.575B maturing within a year, mostly commercial paper classified as long-term due to revolver backstop.
What structural factors support AutoZone's business model?
The company benefits from an aging vehicle fleet (average age 11.7 years and rising), with vehicles seven years or older needing more maintenance. Failure and maintenance categories represent about 84% of sales, which are less discretionary. The model also relies on extended vendor payment terms: the accounts payable-to-inventory ratio of 111.8% allows the company to fund inventory growth largely through supplier financing. Risks include vendors' ability to continue factoring receivables, online competition, and wage pressure.
What are the main risks flagged in the filing?
Key risks include weaker demand from falling gas prices or fewer miles driven, competition from online and mass retailers offering faster delivery, consolidation among competitors, rising labor costs from wage regulation, and supply chain disruptions (about 13% of purchases are imported directly). The filing also highlights cybersecurity and IT system failures, and an open New Jersey environmental matter and a California hazardous-waste subpoena. Management does not expect these legal matters to be material.
06—Continue