AutoZone 2004 Annual Report Download - page 19
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Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations
Wearethenation’sleadingspecialtyretailerofautomotivepartsandaccessories,withmostofoursalestoourDIYcustomers.Webegan
operationsin1979andasofAugust28,2004,operated3,420autopartsstoresintheUnitedStatesand63inMexico.Eachofourstores
carriesanextensiveproductlineforcars,sportutilityvehicles,vansandlighttrucks,includingnewandremanufacturedautomotivehard
parts, maintenance items, accessories and non-automotive products. In many of our domestic stores we also have a commercial sales
programthatprovides commercialcreditandpromptdeliveryof parts andotherproductstolocal,regionalandnationalrepairgarages,
dealersandservicestations.WealsoselltheALLDATAbrandautomotivediagnosticandrepairsoftware.Onthewebatwww.autozone.com,
weselldiagnosticandrepairinformation,autoandlighttruckparts,andaccessories.Wedonotderiverevenuefromautomotiverepair
orinstallation.
ResultsofOperations
Fiscal2004ComparedwithFiscal2003
FortheyearendedAugust28,2004,AutoZonereportedsalesof$5.637billioncomparedwith$5.457billionfortheyearendedAugust
30,2003,a3.3%increasefromfiscal2003.Thisgrowthwasdrivenbyanincreaseinopenstoresandcontinuedgrowthinourcommer-
cialsalesprogram.AtAugust28,2004,weoperated3,420domesticautopartsstoresand63inMexico,comparedwith3,219domestic
autopartsstoresand49inMexicoatAugust30,2003.RetailDIYsalesincreased1.9%andcommercialsalesincreased10.5%overprior
year.Samestoresales,orsalesfordomesticstoresopenatleastoneyear,wereflatduringtheyear.ALLDATAandMexicosalesincreased
overprioryear,contributing0.4percentagepointsofthetotalincrease.Samestoresalesfordomesticstoresincreasedby2%forthefirst
threefiscalquarters,butwereflatfortheyearduetoa3%declineduringthefourthquarter.Whileouraverageticketincreasedoverprior
year,thenumberoftransactionswithbothourDIYandcommercialcustomersdeterioratedduringthelatterpartoftheyear.Thisdeteriora-
tioncorrelatedwiththesuddenriseingasprices.Whilegaspriceshaveebbedandflowedovertime,thisisthefirsttimethatwehaveseen
statistical significance to reduced transactions at the store level. In addition to higher gas prices, it has been reported by the Federal
HighwayAdministrationthatfewermilesweredrivenpervehicle,akeymacrodriverofourindustry,forthelatterpartofourfiscalyear.
Grossprofitforfiscal2004was$2.757billion,or48.9% ofnetsales,compared with$2.515billion,or46.1%ofnetsales,forfiscal
2003.Fiscal2004benefitedfrom$42.1millioningainsfromwarrantynegotiationsascomparedto$8.7millioninwarrantygainsduring
fiscal2003.FurtherbenefitinggrossprofitwastheadoptionofEmergingIssuesTaskForceIssueNo.02-16(“EITF02-16”)duringfiscal
2003,whichrequiresvendorfundingtobeclassifiedasareductiontocostofsales.PriortotheadoptionofEITF02-16,vendorfunding
wasreflectedasareductiontooperating,selling,generalandadministrativeexpenses.TheadoptionofEITF02-16increasedgrossprofit
by$138.2millioninfiscal2004and$42.6millioninfiscal2003;andincreasedoperating,selling,generalandadministrativeexpenses
by$138.2millioninfiscal2004and$52.6millioninfiscal2003.Theremainingimprovementingrossprofitwasdrivenbystrategicpricing
andchangeinproductmix.
Operating,selling,generalandadministrativeexpensesforfiscal2004increasedto$1.758billion,or31.2%ofnetsales,from$1.597
billion,or29.3%ofnetsalesforfiscal2003.Fiscal2003benefitedfroma$4.7millionpre-taxgainassociatedwiththesettlementof
certainliabilitiesandtherepaymentofanoteassociatedwiththesaleoftheTruckProbusinessinDecember2001,anda$4.6million
pre-taxgainasaresultofthedispositionofpropertiesassociatedwiththe2001restructuringandimpairmentcharges.Driversofcurrent
yearexpensesincludedtheimpactofEITF02-16,theincreaseinthenumberofstorerefreshesandanincreaseinnewstoreopenings.
Interestexpense,netforfiscal2004was$92.8millioncomparedwith$84.8millionduringfiscal2003.Thisincreasewasprimarilydue
tohigheraverageborrowinglevelsoverfiscal2003.Averageborrowingsforfiscal2004were$1.8billion,comparedwith$1.5billionfor
fiscal2003.Weightedaverageborrowingrateswere4.6%atAugust28,2004,comparedto4.4%atAugust30,2003.
Oureffectiveincometaxratedeclinedto37.5%ofpre-taxincomeforfiscal2004ascomparedto37.9%forfiscal2003.
Netincomeforfiscal2004increasedby9.4%to$566.2million,anddilutedearningspershareincreasedby22.8%to$6.56from$5.34
infiscal2003.Theimpactofthefiscal2004stockrepurchasesondilutedearningspershareinfiscal2004wasanincreaseofapproxi-
mately$0.20.
Fiscal2003ComparedwithFiscal2002
FortheyearendedAugust30,2003,AutoZonereportedsalesof$5.457billion(52weeks)comparedwith$5.326billion(53weeks)for
theyearendedAugust31,2002,a2.5%increasefromfiscal2002.AtAugust30,2003,weoperated3,219domesticautopartsstores
and49inMexico,comparedwith3,068domesticautopartsstoresand39inMexicoatAugust31,2002.Excludingsalesfromtheextra
weekincludedintheprioryear,saleswereup4.6%(seeReconciliationofNon-GAAPFinancialMeasures).Samestoresales,orsalesfor
domesticstoresopenatleastoneyear,increasedapproximately3%duringtheyear,drivenbyanincreaseincommercialsales.Theimprove-
mentinsamestoresaleswasduemoretoanincreaseinaveragedollarsspentpertransactionovertheamountsinthesameperiodoftheprior
yearthananincreaseintransactioncount.Thebalanceofthe4.6%increasewasduetonewstoresalesforfiscal2003whichcontributed