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Gurwinder Dhillon

April, 2014
The Annual Report Project: AutoZone
A. Introduction
1. William C Rhodes, III
2. 123 S. Front St. Memphis, TN 38103
3. August 31, 2013
4. AutoZone provides parts for all different types of cars such
as oils, nuts and bolts, belts, batteries, lights, and wipers
and etc.
5. Mainly located in the United States with the total of 4,836
stores. They also have 362 stores in Mexico and 3 stores in
Brazil.
6. Ernst & Young are the independent auditors of the
company. There is also an Audit Committee, which consists
of W. Andrew McKenna (Chair), Sue E. Gove, George R.
Mrkonic, and Luis P. Nieto.
7. The auditors say that the internal control of this company is very strong,
their policies and procedure are clearly stated. The records of each
transaction have made their companys financial statements mistake free.
In this company, the independent accountants arent responsible for the
financial statements, but the Audit committee that I listed above is
responsible for the integrity of the companys financial statement.
8. No
9. Management
10.
$434.55
11.
The company does not pay dividends.
12.
U.S. Securities and Exchange Commission
13.
AZO
B. Industry Situation and Company Plans
At first, a recap on the company and how it has been expanding. Their Net
Income grew 6.7% on top of 9.6% the year prior, while Earnings per Share grew
15.6% on top of 20.6% last year1. They have many competitors like Napa Parts,
OReily, Pep boys and others. They have also opened 151 more stores, which
include 41 new stores in Mexico and also the first 3 stores in Brazil. Now
focusing on the future, they have repurchased 1.3 billion of stock. Their future
plans arent clearly stated but they are looking forward to serve their customer
with the great service and put their dedication to the companys growth.
1 http://phx.corporate-ir.net/phoenix.zhtml?c=76792&p=irolreportsAnnual

C. Financial Statements
Income Statement:
1. It is similar to a multi-step format.
2. Gross profit, operating income and net income for the past
two years:
Gross Profit
Operating
Income
Net Income

2012
$4,432

2013
$4,741

$1,629
$930

$1,773
$1,016

*Amount in millions
Over the year all three categories have increased.
Balance sheet:
1. Assets = Liabilities + Stockholders Equity
Assets
=
Liabilities +
Stockholders Equity
2012
$2,978,946 =
$3,655,592 +
$6,265,639
2013
$3,278,013 =
$4,169,150 +
$6,892,089
Statement of Cash Flow
1. The cash flows from operations are more then the net
income from the last 2 years.
2. Capital expenditures are the main investing activity.
($414,451)
3. Purchases of treasury stock ($1,387,315)
4. Cash has increased over the past 2 years.

D. Accounting Policies
1. There are accounting policies relates to as follow:
Revenue Recognition: The Company recognizes sales at the time

the sale is made and the product is delivered to the customer.


Cash: Cash equivalents consist of investments with original
maturities of 90 days or less at the date of purchase. Cash
equivalents include proceeds due from credit and debit card

transactions with settlement terms of less than 5 days.


Merchandise Inventories: Inventories are stated at the lower of
cost or market using the last-in, first-out method for domestic

inventories and the first-in, first out (FIFO) method for Mexico

inventories.
Property and equipment depreciation: Property and equipment is
stated at cost. Depreciation and amortization are using the
straight-line method over the following estimated useful lives:
buildings, 40 to 50 years; building improvements, 5 to 15 years;

equipment, 3 to 10 years; and leasehold improvements.


2. Topics: Business, account receivables, marketable securities, goodwill,
foreign currency, deferred rent, financial instruments, income taxes, etc.
3. Change in opinion: No, I would think that there is a lot of hidden information
about the company like credit term or some other complicated situation for the
customers. From the look of it, their notes have information about just which
methods they use for inventory and depreciation.
E. Ratio Analysis
Test of Liquidity
Current asset
$ 3,278,013
1. Current Ratio: Current liabilities = $ 4,169,150
2. Acid-test (quick) ratio:
Cash+ Short term investments + Net current receivables
Current liabilities
$ 142,191+ $ 171,638
$ 4,169,150

= 0.79

= 0.08

Asset Management
3. Inventory Turnover:

Cost of goods sold


Average inventory

$ 4,406,595
$ 2,861,014

= 1.54

Net credit sales


Average net account receivable

4. Accounts Receivable Turnover:

$ 6,892,089

$ 914,773

= 1.33

Tests of Solvency and Equity Position


5. Debt Ratio:

Total liabilities
Total assets

6. Time-interest-earned ratio:

$ 4,169,150
= 1.27
$ 3,278,013
Operating income
$ 1,773,098
=
Interest expense
$ 185,415
=

= 9.6

Tests of profitability
Net Income
$ 1,016,480
100
=
Net Sales
$ 9,147,530
Net Income+ Interest expense
8. Return on total assets:
=
Average total assets
7. Return on Net Sales:

$ 1,201,895
100
$ 4,767,486

= 25.21%
Net IncomeDividends
Average stkholder s ' equity

Net IncomePref . Dividends


Number of outstanding shares

9. Return of common stockholders equity:

$ 1,016,480$ 0
100
($ 1,617,672 )

= -62.84%

10. Earnings per share of common stock:

$ 1,016,480$ 0
$ 36,581

= 11.11%

= $27.79

Market Analysis
11. Price/earnings ratio:

Market price per share


Earnings per share

$ 434.55
$ 27.79

= 15.64

12. Dividends yield: 0% ( Company doesnt pay dividends)

B. Conclusion
By looking at data on reuter.com2, the sales growth is growing on monthly
basis, but that doesnt mean that company is doing really well. If you have
more stores than last year, then the overall sales will go up. One more
store in the market will drive the sales up overall. The way we can really
know if the sales are going up, we would have to monitor particular stores
and compare their sales from last year or even a year before that. The way
AutoZone is growing will make you think that it is safe to buy their shares
but I wouldnt invest into this company. The reason I would invest into
this is that if we look at its ratios, current ratio is 0.81 which is lower than
1.50, this means that company doesnt have enough assets to pay its
liabilities. The acid ratio also show that company isnt at the point where it
can pay all of its current liabilities if they were due right away. The acidtest ratio is .07, but for them to pay off their current liabilities, it should lie
around 0.90 - 1.0. Now the inventory and account receivable turnover,
Inventory turnover is almost medium, it means that inventory doesnt stay
in very long, which is a good thing. Account receivables are at 30.91
which mean that the company is very good at getting its money from
receivables. Throughout my whole research it shows that AutoZone has a
large amount of debt. The debt ratio is 1.21, which is fairly high.
According to the Accounting book, the time-interest earned ratio is very
2 http://www.reuters.com/finance/stocks/financialHighlights?
symbol=AZO.N

high. Book shows that 2.0 to 3.0 is what safe for the company but
AutoZone has 8.8 and it means that this company will have difficulty
servicing its debt in the future. The returns on net sales have grown from
last year from 6.3% to 10.52%, as well as the Return on stockholders
equity to 17.82%. In the beginning when I started researching AutoZones
financial reports, it looked as though AutoZone was expanding and sales
were up but by looking at the dates it made me realize AutoZone has large
amount of debt and if it was to fail then it wont take long. Especially how
rapidly the technology is changing nowadays.