AutoZone 2005 Annual Report Download - page 22

12
We are the nation’s leading specialty retailer of automotive parts and accessories, with most of our sales to do-it-yourself (“DIY”) customers. We
began operations in 1979 and as of August 27, 2005, operated 3,592 stores in the United States, including 2 in Puerto Rico, and 81 in Mexico. Each
of our stores carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive
hard parts, maintenance items, accessories and non-automotive products. In many of our stores we also have a commercial sales program that pro-
vides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers and service stations.
We also sell the ALLDATA brand automotive diagnostic and repair software. On the web, we sell diagnostic and repair information and automotive
hard parts, maintenance items, accessories, and non-automotive products through www.autozone.com. We do not derive revenue from automotive
repair or installation.
Results฀of฀Operations
Fiscal฀2005฀Compared฀with฀Fiscal฀2004
For the year ended August 27, 2005, AutoZone reported sales of $5.711 billion compared with $5.637 billion for the year ended August 28, 2004,
a 1.3% increase from fiscal 2004. This growth was primarily driven by an increase in the number of open stores. At August 27, 2005, we operated
3,592 domestic stores and 81 in Mexico, compared with 3,420 domestic stores and 63 in Mexico at August 28, 2004. Retail DIY sales increased
1.4% and commercial sales decreased 3.0% from prior year. Same store sales, or sales for domestic stores open at least one year, decreased 2%
from the prior year. ALLDATA and Mexico sales increased over prior year, contributing 0.5 percentage points of the total increase. While our average
ticket increased over prior year, the number of transactions with both our DIY and commercial customers declined from the prior year.
Gross profit for fiscal 2005 was $2.793 billion, or 48.9% of net sales, compared with $2.757 billion, or 48.9% of net sales, for fiscal 2004. Fiscal
2005 benefited from $1.7 million in gains from warranty negotiations as compared to $42.1 million in warranty gains during fiscal 2004. Offsetting the
decline in warranty gains, management continued to improve gross profit margin through merchandising initiatives such as product cost negotiations
and changes in product mix.
Operating, selling, general and administrative expenses for fiscal 2005 increased to $1.817 billion, or 31.8% of net sales, from $1.758 billion, or
31.2% of net sales for fiscal 2004. This increase is primarily related to the $40.3 million adjustment, or 0.7% of net sales, related to accounting for
leases (see “Note J—Leases” in the accompanying Notes to Consolidated Financial Statements).
Interest expense, net for fiscal 2005 was $102.4 million compared with $92.8 million during fiscal 2004. This increase was due to higher average
borrowing levels and rates. Average borrowings for fiscal 2005 were $1.970 billion, compared with $1.787 billion for fiscal 2004. Weighted average
borrowing rates were 5.2% at August 27, 2005, compared to 4.6% at August 28, 2004. The increase in interest rates reflects both the ongoing effort
to extend the terms of our borrowings, as well as the impact from increased short-term rates.
Our effective income tax rate declined to 34.6% of pre-tax income for fiscal 2005 as compared to 37.5% for fiscal 2004. The current year effective rate
reflects $21.3 million in one-time tax benefits related to the planned repatriation of earnings from our Mexican operations as a result of the American
Jobs Creation Act of 2004, and other discrete income tax items.
Net income for fiscal 2005 increased by 0.9% to $571.0 million, and diluted earnings per share increased by 9.5% to $7.18 from $6.56 in fiscal 2004.
The impact of the fiscal 2005 stock repurchases on diluted earnings per share in fiscal 2005 was an increase of approximately $0.10.
Fiscal฀2004฀Compared฀with฀Fiscal฀2003
For the year ended August 28, 2004, AutoZone reported sales of $5.637 billion compared with $5.457 billion for the year ended August 30, 2003,
a 3.3% increase from fiscal 2003. This growth was driven by an increase in open stores and continued growth in our commercial sales program.
At August 28, 2004, we operated 3,420 domestic stores and 63 in Mexico, compared with 3,219 domestic stores and 49 in Mexico at August 30,
2003. Retail DIY sales increased 1.9% and commercial sales increased 10.5% over prior year. Same store sales, or sales for domestic stores open
at least one year, were flat during the year. ALLDATA and Mexico sales increased over prior year, contributing 0.4 percentage points of the total
increase. Same store sales for domestic stores increased by 2% for the first three fiscal quarters, but were flat for the year due to a 3% decline dur-
ing the fourth quarter. While our average ticket increased over prior year, the number of transactions with both our DIY and commercial customers
deteriorated during the latter part of the year.
Gross profit for fiscal 2004 was $2.757 billion, or 48.9% of net sales, compared with $2.515 billion, or 46.1% of net sales, for fiscal 2003. Fiscal 2004
benefited from $42.1 million in gains from warranty negotiations as compared to $8.7 million in warranty gains during fiscal 2003. Further benefiting
gross profit was the adoption of Emerging Issues Task Force Issue No. 02-16 (“EITF 02-16”) during fiscal 2003, which requires vendor funding to
be classified as a reduction to cost of sales. Prior to the adoption of EITF 02-16, vendor funding was reflected as a reduction to operating, selling,
general and administrative expenses. The adoption of EITF 02-16 increased gross profit by $138.2 million in fiscal 2004 and $42.6 million in fiscal
2003; and increased operating, selling, general and administrative expenses by $138.2 million in fiscal 2004 and $52.6 million in fiscal 2003. The
remaining improvement in gross profit was driven by strategic pricing and change in product mix.
Management’s Discussion and Analysis of Financial Condition and Results of Operations