01—Abstract
Summary
Summary of the 10-K filed October 28, 2019. Cited figures are marked; the original filing is the authoritative source.
AutoZone (AZO) closed fiscal 2019 (53 weeks ended August 31, 2019) with record net income of $1.617 billiona, up 20.9% year over year, and diluted EPS of $63.43, up 30.1%.
Net sales grew 5.7% to $11.864 billionb, driven by 209 net new stores, a 3.0% domestic same-store sales increase, and the extra 53rd week. Gross margin expanded 41 basis points to 53.7%, and operating SG&A fell to 35.0% of sales from 37.1%, largely because fiscal 2018 carried $193.2 million of impairment charges and $130.3 million of pension termination charges. Commercial sales, a key growth lever, rose 15.7%.
Cash generation was strong, with operating cash flow of $2.129 billionc. The company returned $2.005 billion through share repurchases, funded mainly from operations, and still ended with $1.030 billion of commercial paper outstanding and a stockholders' deficit of $1.714 billion. Management frames this deficit as a deliberate result of aggressive buybacks, not weakness.
Return on invested capital rose to 35.7% from 32.1%, and the adjusted debt-to-EBITDAR ratio held at 2.5x against an investment-grade target. The board added $1.25 billiond to the buyback authorization in October 2019, leaving about $1.44 billion available. Key risks include sensitivity to fuel prices, wage inflation, competition from online and multi-channel retailers, and cyber-security exposure.
Management expects higher investment in fiscal 2020, and a new lease accounting standard (ASU 2016-02) will add an estimated $2.5 to $2.8 billion of right-of-use assets and lease liabilities on adoption. Investors should weigh the strong earnings and return metrics against the rising leverage and the fact that the fiscal 2019 earnings benefited from an extra week.
02—Key points
Key Highlights
- Record net income of $1.617B (+20.9%) and diluted EPS of $63.43 (+30.1%), helped by a 53-week fiscal year and the absence of prior-year impairment and pension charges
- Net sales of $11.864B (+5.7%), with domestic same-store sales up 3.0% and domestic commercial sales up 15.7%
- Gross margin rose to 53.7% (+41 bps); SG&A fell to 35.0% of sales from 37.1%
- Operating cash flow of $2.129B funded $2.005B of share repurchases; the board added $1.25B to the buyback authorization in October 2019
- After-tax ROIC improved to 35.7% from 32.1%; adjusted debt/EBITDAR held at 2.5x
- Store footprint reached 6,411 locations (5,772 U.S., 604 Mexico, 35 Brazil) after 209 net new openings
- Stockholders' deficit widened to $1.714B and debt rose to $5.206B, reflecting the buyback-driven capital structure; ASU 2016-02 adds an estimated $2.5–2.8B of lease liabilities from fiscal 2020
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, AutoZone Inc kept $0.14.
- Revenue$11.86B100.0%
- Cost of revenue−$5.50B46.3%
- Gross profit$6.37B53.7%
- Operating costs−$4.15B35.0%
- Operating income$2.22B18.7%
- Interest, other & tax−$598.9M5.0%
- Net income$1.62B13.6%
Where FY2019 revenue went
$11.86B- Cost of revenue: $5.50B, 46% of revenue
- SG&A: $4.15B, 35% of revenue
- Net income: $1.62B, 14% of revenue
- Interest, other & tax: $598.9M, 5.0% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed October 28, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $11.86B$11.22B | +5.7% |
| Cost of Revenue | $5.50B$5.25B | +4.8% |
| Gross Profit | $6.37B$5.97B | +6.5% |
| SG&A Expenses | $4.15B$4.16B | −0.3% |
| Operating Income | $2.22B$1.81B | +22.4% |
| Interest Expense | $193.67M$181.67M | +6.6% |
| Net Income | $1.62B$1.34B | +20.9% |
| EPS (Basic) | $64.78$49.59 | +30.6% |
| EPS (Diluted) | $63.43$48.77 | +30.1% |
| Shares Outstanding (Basic) | 24.97M26.97M | −7.4% |
| Shares Outstanding (Diluted) | 25.50M27.42M | −7.0% |
05—Questions
Frequently Asked Questions
Why did AutoZone's net income grow so much faster than sales in fiscal 2019?
Net income rose 20.9% against 5.7% sales growth mainly because fiscal 2018 included $193.2M of impairment charges tied to the IMC and AutoAnything sales and $130.3M of pension termination charges. Gross margin also improved 41 bps, and an extra 53rd week added about $238.6M of sales. Share repurchases, which cut diluted share count from 27.4M to 25.5M, lifted EPS by about $1.83. Fiscal 2019 also benefited from a lower tax rate of 20.4% versus 18.3% in fiscal 2018, though that comparison was itself affected by Tax Reform.
Is AutoZone's stockholders' deficit a concern for investors?
The deficit of $1.714B is a result of cumulative share repurchases exceeding retained earnings, not operating losses. The company generates strong cash flow, maintains investment-grade credit ratings, and keeps adjusted debt to EBITDAR at 2.5x. Management targets this leverage level deliberately. The risk is that a sharp earnings decline or a credit rating downgrade could limit financing flexibility and raise borrowing costs, as the risk factors describe.
How much does fuel price volatility affect AutoZone's business?
Management says gas prices affect customers' disposable income and driving behavior. Average U.S. unleaded gasoline was $2.63 per gallon in fiscal 2019 versus $2.67 in fiscal 2018. The company notes that each $1 decrease at the pump adds roughly $12 billion of monthly consumer spending capacity across the U.S. Higher prices can reduce miles driven and deferred maintenance, though management cannot predict the direction or magnitude of future changes.
What are the main growth drivers and risks for AutoZone going forward?
Growth drivers include continued store openings (209 net new in fiscal 2019), commercial sales growth (up 15.7%), hub and mega-hub distribution that improves product availability, and the rising average age of vehicles, now 11.8 years. Key risks include competition from online and multi-channel retailers, wage inflation from regulatory and market pressure, dependence on key vendors (one supplied about 12% of purchases), and cyber-security threats. Management expects increased investment in fiscal 2020.
How will the new lease accounting standard affect AutoZone's reported financials?
Under ASU 2016-02, AutoZone expects to record right-of-use assets and lease liabilities of roughly $2.5B to $2.8B when it adopts the standard in the first quarter of fiscal 2020. This will add substantially to reported liabilities and make the balance sheet look more leveraged, even though the underlying lease obligations already exist as off-balance-sheet commitments of about $2.2B in operating leases. Investors should expect reported leverage metrics to change, though the economic substance of the company's obligations is unchanged.
06—Continue