EXHIBIT 13.1
[PHOTOGRAPH OF AN AUTOZONE STORE IN BACKGROUND APPEARS HERE]
1 9 9 7 A N N U A L R E P O R T
[PHOTOGRAPH OF A MAN AND 2 YOUTHS LOOKING AT A VEHICLE FRONT WITH HOOD UP
APPEARS HERE]
Company Description
AutoZone is the nation's leading auto parts chain. We sell a broad line of
replacement parts, accessories, chemicals and motor oil. With 1,728 stores in 32
states, we operate more stores than any auto parts retailer in America. On
average, we open the doors on a new AutoZone store nearly every day.
Our primary customers are do-it-yourselfers who repair their own cars to
save money. We also sell and deliver parts to professional repair shops whose
technicians install parts for a living.
The first AutoZone store opened in Forrest City, Arkansas, on July 4, 1979.
Eighteen years later, we still attribute much of our success to our fanatical
commitment to customer satisfaction. There's a pledge you'll hear recited
throughout AutoZoneland that helps us keep our focus:
AutoZoners always put customers first.
We know our parts and products.
Our stores look great.
And we've got the best merchandise at the right price.
[MAP OF THE UNITED STATES APPEARS HERE]
Financial Highlights
1997 1996* % Change
Sales $2,691,440,000 $2,242,633,000 +20%
Operating Profit $321,351,000 $268,934,000 +19%
Net Income $195,008,000 $167,165,000 +17%
Earnings Per Share $1.28 $1.11 +15%
Stockholders' Equity $1,075,208,000 $865,582,000 +24%
Number of Stores 1,728 1,423 +21%
*includes a 53rd week
[MID TO EASTERN UNITED STATES MAP APPEARS HERE]
. Store Support Center
Memphis, TN
. Distribution Centers
Danville, IL
Lafayette, LA
Lavonia, GA
Lexington, TN
Phoenix, AZ
San Antonio, TX
Zanesville, OH
AutoZone Stores
By State
. Alabama.................. 77
. Arizona.................. 64
. Arkansas................. 39
* California............... 8
. Colorado................. 32
. Florida.................. 82
. Georgia.................. 96
. Illinois................. 56
. Indiana.................. 85
* Iowa..................... 10
. Kansas................... 31
. Kentucky................. 48
. Louisiana................ 70
* Maryland................. 1
. Michigan................. 27
. Mississippi.............. 61
. Missouri................. 72
* Nevada................... 1
. New Mexico............... 23
* New York................. 11
. North Carolina........... 87
. Ohio.....................166
. Oklahoma................. 60
. Pennsylvania............. 28
. South Carolina........... 49
. Tennessee................106
. Texas....................264
. Utah..................... 19
. Virginia................. 34
. West Virginia............ 13
. Wisconsin................ 5
. Wyoming.................. 3
* Indicates a new state for F97
SALES
($ millions)
[BAR GRAPH APPEARS HERE]
93 94 95 96 97
-- -- -- -- --
1,217 1,508 1,808 2,243 2,691
NET
Income
($ millions)
[BAR GRAPH APPEARS HERE]
93 94 95 96 97
-- -- -- -- --
87 116 139 167 195
OPERATING
Profit
($ millions)
[BAR GRAPH APPEARS HERE]
93 94 95 96 97
-- -- -- -- --
141 191 228 269 321
EARNINGS
Per Share ($)
[BAR GRAPH APPEARS HERE]
93 94 95 96 97
-- -- -- -- --
.59 .78 .93 1.11 1.28
To our Customers, AutoZoners and Stockholders:
Fiscal 1997 -- the year we finally answered the frequently asked question, "When
will AutoZone be in California?" That answer came on July 4 -- our 18th birthday
- -- when we opened our doors in the town of El Centro. While we're excited about
saying we now serve customers from coast to coast, we've continued to focus on
being our customers' neighborhood auto parts store everywhere we do business.
El Centro was just one of 305 net new stores we opened in fiscal 1997. And
one of many we opened in markets where we didn't have a presence 12 months ago.
That means our customer base both the do-it-yourself (DIY) market and the
professional mechanic sector we call commercial -- continues to expand, along
with the number of AutoZone neighborhoods. We also:
. Entered five new states California, Iowa, Maryland, Nevada and New York.
. Turned a profit in our commercial sales program.
. Surpassed the $1 billion mark in stockholders' equity.
Fiscal 1997 was another record year financially:
. Sales rose 20% to $2.69 billion.
. Comparable store sales increased by 8%.
. Net income increased 17% to $195 million.
. Earnings per share rose 15% to $1.28.
We're particularly pleased with our financial gains, given the fact that
we're measuring ourselves against a 53-week year in fiscal 1996. We're gaining
leverage on expenses through a revival of our culture of thrift -- more commonly
known outside AutoZone as tight expense control.
Less than two years ago we were kicking off the commercial program in our
first store. Today that business accounts for more than 10% of our total sales.
And although DIY sales were soft industrywide for the first half of the year,
we've felt a real momentum shift since the third quarter. Looking ahead, we will
maintain our focus on our core DIY business and expect the commercial business
to continue to have a favorable impact on same store sales and earnings as it
grows.
Once again, our new store openings are among the best in retailing. With
the addition of 305 net new stores, we ended the year with 1,728 stores in 32
states. We're confident there's still lots of room for expansion, and we project
350
2
AFTER TAX RETURN
On Capital
[BAR GRAPH APPEARS HERE]
93 94 95 96 97
-- -- -- -- --
18% 19% 19% 18% 16%
[PHOTOGRAPH OF TIM VARGO AND JOHN ADAMS APPEARS HERE]
President Tim Vargo and Chairman John Adams
new stores in the coming year.
Professional technicians across the nation are reaping the benefits of the
research and development investment we've made this year in ALLDATA. In the
coming year, we believe ALLDATA's software will rise to a new level - clearly
establishing itself as the unassailable leader in automotive diagnostic and
repair information.
We'd like to take this opportunity to thank Pitt Hyde and Tom Hanemann for
their leadership and service to AutoZone. Tom retired after 23 years, dating
back to his days with Malone & Hyde, our former parent company. He was vital in
developing AutoZone's culture and his influence will be felt for years to come.
Pitt retired 18 years after founding AutoZone and 30 years after joining
Malone & Hyde. His vision of taking customer service to a new level in the auto
parts industry is what made AutoZone the best in the business. Pitt continues to
offer his expertise as a member of our board.
If you've followed AutoZone closely as we've grown, you won't find our
strategy for the coming year all that unusual. We'll continue to profitably
expand our store count faster than anyone else in our industry. We'll continue
to seek out competitive advantages in areas like technology, store design and
product quality. And we will always look for new opportunities to create more
value for our customers.
Wall Street may see AutoZone as a rapidly growing chain of more than 1,700
stores spread across 32 states. But we know that to our millions of loyal
customers, AutoZone is the man or woman in the red shirt behind the counter of
the neighborhood auto parts store just a few minutes from home. As we focus on
growing our business and gaining new customers, we'll never lose sight of our
obligation to invest in the more than 28,000 AutoZoners who continue to find new
ways to deliver extraordinary customer service every day.
/s/ John Adams /s/ Tim Vargo
John Adams Tim Vargo
Chairman & CEO President & COO
Customer Satisfaction Customer Satisfaction
3
Your neighborhood auto parts store -- all across America.
4
From Sumter, South Carolina to El Centro, California. From Indianapolis, Indiana
to Brownsville, Texas. From Detroit, Michigan to Andalusia, Alabama. It's
something that's as common in small town America as it is in our bustling big
cities. The neighborhood AutoZone store.
It was born in Forrest City, Arkansas, in 1979. Needless to say, we've come
a long way since then. We've grown from a small time operation in the South to
the nation's leading auto parts chain with stores from coast to coast. We've
introduced and helped develop new products. We're constantly fine-tuning the way
our stores are designed and operated. We're even into the development of
automotive diagnostic and repair software.
Fact of the matter is, we've enhanced our business in more ways than we
have room to mention here. But for all the enhancements, there's a part of our
business we don't want to change a bit. And that's the way we relate to our
customers. We can create whizbang systems `til the cows come home, but if we
don't treat our customers like friends and give them the service they deserve,
we can kiss it all goodbye.
Because when it's all said and done, AutoZone is still the place where
somebody's dad, somebody's mom, somebody's uncle, friend or neighbor goes to buy
parts. The place where we know the regulars and they know us. Where we can tell
newcomers the best way to fix a leaky radiator or just the best place to get a
bite to eat. Because while we're in a lot more neighborhoods than ever before,
we're still your neighborhood auto parts store.
[PHOTOGRAPH OF A YOUTH STANDING IN FRONT OF AN ANTIQUE CADILLAC APPEARS HERE]
5
[PHOTO OF MOUNTAIN APPEARS HERE]
Yucaipa
California
Nestled in the foothills of the San Bernardino mountains is the community of
Yucaipa. The Serrano Indians first viewed this land from the backs of horses and
gave the town its name, which means "green valley." The current natives still
rely on horsepower, but their horses tend to reside under the hoods of their
cars and trucks.
[PHOTO OF TWO PEOPLE APPEARS HERE]
More than 500 Yucaipa residents are members of the town's four car clubs -- a
tribute to Southern California's hot rod heritage. One local car enthusiast is
AutoZone customer Jeff Ranney. And his pride and joy is a `68 Chevy pickup.
[PHOTO OF TRUCK APPEARS HERE]
Jeff is co-owner of a local repair shop and was one of our very first
customers when we opened our doors in July. "When you buy as many parts as I do,
you've got to trade with people who are serious about quality," he says. "The
price has to be right on, because I have to watch my bottom line, too. And of
course, there`s also my reputation. I can't risk it on poor quality parts. I
trust the people at AutoZone. They always take the time to help you out and let
you know your business is appreciated."
[PHOTO OF CARS APPEARS HERE]
[PHOTO OF TRUCK APPEARS HERE]
That's a testimonial we're pretty proud of from somebody who's eager to be
one of our first commercial customers in the state of California. At press time,
Yucaipa`s commercial program wasn`t in place. That`s because in new stores, we
get our core do-it-yourself business up and running before we roll out
commercial. But rest assured, Jeff is at the top of our list. And we know he`ll
be in good company with our thousands of other commercial customers all across
the country.
[PHOTO OF SIGN STATING "WELCOME TO YUCAIPA" APPEARS HERE]
6
[PHOTO OF AUTOZONE STORE WITH ANTIQUE CARS PARKED IN FRONT APPEARS HERE]
7
[PHOTO OF CITY SKYLINE APPEARS HERE]
Cedar Rapids
Iowa
If rolling cornfields and dusty farm roads are the only images you associate
with Iowa, you probably haven't been there lately. In Cedar Rapids, towering
grain silos and windmills share the skyline with office buildings, manufacturing
facilities and neighborhood stores, like AutoZone.
[PHOTO OF TWO PEOPLE APPEARS HERE]
Mark Petersen manages the AutoZone store on Blairs Ferry Road -- one of
three that opened in Cedar Rapids this year and one of 305 that opened up all
across America. If you had driven down Blairs Ferry Road five years ago, you
would've seen nothing but corn. Today it's one of the busiest shopping areas in
town.
[PHOTO OF SIGN STATING "WELCOME TO CEDAR RAPIDS" APPEARS HERE]
Mark grew up in the area, and he's excited to work for a company that's
part of the city`s growth. "When I returned home after four years in the Air
Force, I almost didn't recognize some parts of town," Mark said. "But what's
great is that we still look out for each other, no matter how big Cedar Rapids
has gotten. When new people move here, they aren't strangers very long."
[PHOTO OF TRACTOR APPEARS HERE]
Although his store isn't a year old yet, Mark already has a list of regular
customers a mile long. "We knew many of our customers before AutoZone ever came
to town. And when new people come through the doors, we make it a point to get
to know them, too." Mark says this is one of the things that sets AutoZone
apart. "If we know what our customers drive and the kinds of problems they've
been having, we'll be able to solve their problems better the next time they
come in."
Customers in Cedar Rapids -- whether they're lifelong residents or new to
the area -- can count on us for everything from alternators for their 1979
Oldsmobile Cutlasses to control modules for their 1995 Chevy Luminas. And just
in case, we even carry batteries for 1994 John Deere model 8960 tractors.
[PHOTO OF AUTOZONE STORE APPEARS HERE]
8
[PHOTO OF AUTOZONE TRUCK APPEARS HERE]
9
[PHOTO OF TRAFFIC APPEARS HERE]
HOUSTON
TEXAS
People in Texas are proud of their reputation for doing things in big ways. From
the vast plains of the West Texas cattle ranches to the sprawling oil refineries
of Beaumont, that same pride is found in our 264 stores throughout the Lone Star
State. Perhaps none more so than at a store in Houston fondly referred to as
"Sergeant Garcia."
[PHOTO OF TWO PEOPLE APPEARS HERE]
Located in the heart of a Hispanic neighborhood, this store sits next
to a quiet side street named after WWII hero Sergeant Juan Garcia. The store has
been a part of the community so long that a few of the AutoZoners have become
almost as legendary as the Sergeant himself. Joe Calvillo is a great example.
Having worked in other parts stores for many years, Joe came to AutoZone about
nine years ago. When he did, many of his customers came with him.
[PHOTO OF THREE PEOPLE APPEARS HERE]
They like the way he goes the extra mile to get the job done right. It's
because of people like Joe that the Sergeant Garcia store is one of the
company's highest volume stores. It was one of the first stores to receive
multiple deliveries of merchandise a week to serve its customers better. And
like the folks in their neighborhood, each and every AutoZoner at Sergeant
Garcia speaks fluent Spanish.
[PHOTO OF TRUCK APPEARS HERE]
So how has the store remained so successful despite other parts stores
moving into the neighborhood? Joe probably summed it up best, "Tratamos a
nuestros clientes como queremos ser tratados." That's "We treat our customers
the way we'd want to be treated." -- for the Spanish impaired.
Joe speaks other languages his customers appreciate, as well. Ford and
Chevy, just to name a couple.
[PHOTO OF TWO PEOPLE WORKING ON CAR APPEARS HERE]
10
[PHOTO OF AUTOZONE STORE APPEARS HERE]
11
[PHOTO OF TOWN APPEARS HERE]
Johnstown
Pennsylvania
The state of Pennsylvania is well known as the home of "the City of Brotherly
Love." But due west of Philadelphia, at the junction of the Conemaugh and
Stonycreek rivers is a town you may not have heard quite as much about,
Johnstown -- "the Friendly City."
[PHOTO OF TWO PEOPLE APPEARS HERE]
With our focus on pleasing customers, we knew we'd be right at home in a
town with this motto, but our customer service has impressed even the
friendliest of residents. Take Ken Bilger, the service manager at the Horner
Street Service Station, for example. Ken's been coming by a couple of times a
day ever since we opened our doors. "There's just something different about the
way they treat you here," Ken says. "They don't just sell parts -- they really
listen to your problem and help you try to solve it."
[PHOTO OF AUTOZONE STORE APPEARS HERE]
Those are the kind of comments Lynn Shumate likes to hear. After all, she's the
manager of our Johnstown store. Lynn and her husband, Ron, moved to Johnstown
from Memphis. His job? He's the manager of the AutoZone in nearby Somerset,
Pennsylvania. "We kept hearing about how the company needed experienced
AutoZoners in this market," Lynn said. "We're glad we got this opportunity. We
feel a little bit like pioneers, spreading the AutoZone culture in a new
district."
[PHOTO OF PERSON WORKING ON VEHICLE APPEARS HERE]
Since our Johnstown store was the first we opened in the area, Lynn and Ron
trained six new crews for stores in neighboring towns. "The thing that sets
AutoZone apart is our culture -- and that boils down to our people. It was neat
to teach new AutoZoners how we treat our customers," Lynn said. "We were
responsible for seeing that the same service we've been delivering down South
was happening up here." These two transplanted Southerners have found their new
home to be just what it claims to be -- "the Friendly City." What they haven't
found is a place that serves grits.
[PHOTO OF SIGN STATING "JOHNSTOWN WELCOMES YOU" APPEARS HERE]
12
[PHOTO OF TOWN APPEARS HERE]
13
Ten-Year Review
(in thousands, except per share data and selected operating data)
5-Year 10-Year
Compound Compound ------------------------------------
Growth Growth 1997 1996*
------------------------------------
Income Statement Data
Net sales....................................................... 22% 22% $ 2,691,440 $ 2,242,633
Cost of sales, including warehouse and delivery expenses........ 1,559,296 1,307,638
Operating, selling, general and administrative expenses......... 810,793 666,061
------------------------------------
Operating profit................................................ 25% 35% 321,351 268,934
Interest income (expense)....................................... (8,843) (1,969)
------------------------------------
Income before income taxes...................................... 24% 42% 312,508 266,965
Income taxes.................................................... 117,500 99,800
------------------------------------
Net income...................................................... 25% 47% $ 195,008 $ 167,165
------------------------------------
Net income per share............................................ 24% 46% $1.28 $1.11
====================================
Average shares outstanding, including common stock equivalents.. 152,535 151,238
Balance Sheet Data
Current assets.................................................. $778,802 $613,097
Working capital................................................. 186,350 219
Total assets.................................................... 1,884,017 1,498,397
Current liabilities............................................. 592,452 612,878
Debt ........................................................... 198,400 94,400
Stockholders' equity............................................ 1,075,208 865,582
Selected Operating Data
Number of stores at beginning of year........................... 1,423 1,143
New stores................................................ 308 280
Replacement stores........................................ 17 31
Closed stores............................................. 3 0
Net new stores............................................ 305 280
Number of stores at end of year................................. 1,728 1,423
Total store square footage (000's).............................. 11,611 9,437
Percentage increase in square footage........................... 23% 26%
Percentage increase in comparable store net sales............... 8% 6%
Average net sales per store (000's)............................. $1,691 $1,702
Average net sales per store square foot......................... $253 $258
Total employment................................................ 28,700 26,800
Gross profit -- percentage of sales............................. 42.0% 41.7%
Operating profit -- percentage of sales......................... 11.9% 12.0%
Net income -- percentage of sales............................... 7.2% 7.5%
Debt-to-capital -- percentage................................... 15.6% 9.8%
Inventory turnover.............................................. 2.5x 2.7x
Return on average equity........................................ 20% 22%
* 53 weeks. Comparable store sales, average net sales per store and average net
sales per store square foot for fiscal year 1996 and 1991 have been adjusted
to exclude net sales for the 53rd week.
14
Fiscal Year Ended August
------------------------------------------------------------------
1995 1994 1993 1992 1991*
------------------------------------------------------------------
Income Statement Data
Net sales..................................................... $1,808,131 $1,508,029 $1,216,793 $1,002,327 $817,962
Cost of sales, including warehouse and delivery expenses...... 1,057,033 886,068 731,971 602,956 491,261
Operating, selling, general and administrative expenses....... 523,440 431,219 344,060 295,701 247,355
------------------------------------------------------------------
Operating profit.............................................. 227,658 190,742 140,762 103,670 79,346
Interest income (expense)..................................... 623 2,244 2,473 818 (7,295)
------------------------------------------------------------------
Income before income taxes.................................... 228,281 192,986 143,235 104,488 72,051
Income taxes.................................................. 89,500 76,600 56,300 41,200 27,900
------------------------------------------------------------------
Net income.................................................... $ 138,781 $ 116,386 $ 86,935 $ 63,288 $ 44,151
------------------------------------------------------------------
Net income per share.......................................... $0.93 $0.78 $0.59 $0.43 $0.33
==================================================================
Average shares outstanding, including common stock equivalents 149,302 148,726 147,608 145,940 134,656
Balance Sheet Data
Current assets................................................ $447,822 $424,402 $378,467 $279,350 $233,439
Working capital............................................... 30,273 85,373 92,331 72,270 55,807
Total assets.................................................. 1,111,778 882,102 696,547 501,048 397,776
Current liabilities........................................... 417,549 339,029 286,136 207,080 177,632
Debt ......................................................... 13,503 4,252 4,458 7,057 7,246
Stockholders' equity.......................................... 684,710 528,377 396,613 278,120 204,628
Selected Operating Data
Number of stores at beginning of year......................... 933 783 678 598 538
New stores.............................................. 210 151 107 82 60
Replacement stores...................................... 29 20 20 14 4
Closed stores........................................... 0 1 2 2 0
Net new stores.......................................... 210 150 105 80 60
Number of stores at end of year............................... 1,143 933 783 678 598
Total store square footage (000's)............................ 7,480 5,949 4,839 4,043 3,458
Percentage increase in square footage......................... 26% 23% 20% 17% 14%
Percentage increase in comparable store net sales............. 6% 9% 9% 15% 12%
Average net sales per store (000's)........................... $1,742 $1,758 $1,666 $1,570 $1,408
Average net sales per store square foot....................... $269 $280 $274 $267 $246
Total employment.............................................. 20,200 17,400 15,700 13,200 11,700
Gross profit -- percentage of sales........................... 41.5% 41.2% 39.8% 39.8% 39.9%
Operating profit -- percentage of sales....................... 12.6% 12.6% 11.5% 10.3% 9.7%
Net income -- percentage of sales............................. 7.7% 7.7% 7.1% 6.3% 5.4%
Debt-to-capital -- percentage................................. 1.9% 0.8% 1.1% 2.5% 3.4%
Inventory turnover............................................ 2.9x 3.0x 3.2x 3.0x 2.6x
Return on average equity...................................... 23% 25% 26% 26% 31%
Fiscal Year Ended August
--------------------------------------------------
1990 1989 1988 1987
--------------------------------------------------
Income Statement Data
Net sales..................................................... $671,725 $535,843 $437,399 $354,205
Cost of sales, including warehouse and delivery expenses...... 416,846 341,130 277,043 224,878
Operating, selling, general and administrative expenses....... 205,609 169,786 142,868 113,123
--------------------------------------------------
Operating profit.............................................. 49,270 24,927 17,488 16,204
Interest income (expense)..................................... (10,936) (9,799) (8,826) (7,107)
--------------------------------------------------
Income before income taxes.................................... 38,334 15,128 8,662 9,097
Income taxes.................................................. 14,840 6,200 3,770 4,980
--------------------------------------------------
Net income.................................................... $ 23,494 $ 8,928 $ 4,892 $ 4,117
--------------------------------------------------
Net income per share.......................................... $0.19 $0.07 $0.04 $0.03
==================================================
Average shares outstanding, including common stock equivalents 121,212 119,320 119,936 119,096
Balance Sheet Data
Current assets................................................ $191,736 $177,824 $137,098 $124,569
Working capital............................................... 26,803 35,831 35,226 26,760
Total assets.................................................. 327,368 296,546 232,977 213,076
Current liabilities........................................... 164,933 141,993 101,872 97,809
Debt ......................................................... 74,851 93,293 77,138 65,500
Stockholders' equity.......................................... 80,356 54,592 45,608 40,795
Selected Operating Data
Number of stores at beginning of year......................... 504 440 396 313
New stores.............................................. 38 70 47 84
Replacement stores...................................... 7 7 1 0
Closed stores........................................... 4 6 3 1
Net new stores.......................................... 34 64 44 83
Number of stores at end of year............................... 538 504 440 396
Total store square footage (000's)............................ 3,031 2,758 2,318 2,029
Percentage increase in square footage......................... 10% 19% 14% 30%
Percentage increase in comparable store net sales............. 13% 10% 6% 10%
Average net sales per store (000's)........................... $1,289 $1,135 $1,046 $999
Average net sales per store square foot....................... $232 $211 $201 $198
Total employment.............................................. 9,300 7,900 7,100 6,300
Gross profit -- percentage of sales........................... 37.9% 36.3% 36.6% 36.5%
Operating profit -- percentage of sales....................... 7.3% 4.6% 4.0% 4.6%
Net income -- percentage of sales............................. 3.5% 1.7% 1.1% 1.2%
Debt-to-capital -- percentage................................. 48.2% 63.1% 62.8% 61.6%
Inventory turnover............................................ 2.4x 2.4x 2.3x 2.3x
Return on average equity...................................... 35% 18% 11% 11%
15
QUARTERLY SUMMARY
(Unaudited)
Sixteen
Twelve Weeks Ended Weeks Ended
-------------------------------------------------------------------
(in thousands, except per share data)
NOVEMBER 23, FEBRUARY 15, MAY 10, AUGUST 30,
1996 1997 1997 1997
-------------------------------------------------------------------
Net sales.................................... $569,145 $538,012 $637,895 $946,388
Increase in comparable store sales........... 7% 10% 7% 8%
Gross profit................................. $240,298 $226,956 $268,975 $395,915
Operating profit............................. 61,898 49,217 76,775 133,461
Income before income taxes................... 60,725 47,107 74,103 130,573
Net income................................... 37,975 29,407 46,103 81,523
Net income per share......................... 0.25 0.19 0.30 0.53
Stock price range:
High....................................... $ 30.63 $ 27.50 $ 26.13 $ 29.50
Low........................................ $ 24.50 $ 20.13 $ 22.25 $ 22.25
Seventeen
Weeks Ended
-------------------------------------------------------------------
NOVEMBER 18, FEBRUARY 10, MAY 4, AUGUST 31,
1995 1996 1996 1996
-------------------------------------------------------------------
Net sales.................................... $463,029 $425,838 $524,175 $829,591
Increase in comparable store sales........... 5% 3% 8% 7%
Gross profit................................. $193,220 $176,033 $215,531 $350,211
Operating profit............................. 55,397 43,424 60,432 109,681
Income before income taxes................... 55,397 43,424 59,705 108,439
Net income................................... 34,797 27,324 37,605 67,439
Net income per share......................... 0.23 0.18 0.25 0.44
Stock price range:
High....................................... $ 29.63 $ 30.13 $ 37.50 $ 37.13
Low........................................ $ 24.75 $ 24.13 $ 25.75 $ 27.00
16
FINANCIAL REVIEW
Results of Operations
The following table sets forth income statement data of AutoZone expressed as
a percentage of net sales for the periods indicated:
FISCAL YEAR ENDED
----------------------------------
AUGUST 30, AUGUST 31, AUGUST 26,
1997 1996 1995
----------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales, including warehouse
and delivery expenses 58.0 58.3 58.5
----------------------------------
Gross profit 42.0 41.7 41.5
Operating, selling, general
and administrative expenses 30.1 29.7 28.9
----------------------------------
Operating profit 11.9 12.0 12.6
Interest expense -- net 0.3 0.1
Income taxes 4.4 4.4 4.9
----------------------------------
Net income 7.2% 7.5% 7.7%
==================================
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased by $448.8 million or 20.0% over net sales
for fiscal 1996. This increase was due to a comparable store net sales increase
of 8% (which was primarily due to sales growth in the Company's newer stores and
the added sales of the Company's commercial program) and an increase in net
sales of $313.1 million for stores opened since the beginning of fiscal 1996,
offset by net sales for the 53rd week of fiscal 1996. At August 30, 1997, the
Company had 1,728 stores in operation, a net increase of 305 stores, or
approximately 23% in new store square footage for the year.
Gross profit for fiscal 1997 was $1,132.1 million, or 42.0% of net sales,
compared with $935.0 million, or 41.7% of net sales, for fiscal 1996. The
increase in gross profit percentage was due primarily to improved leveraging of
warehouse and delivery expenses.
Operating, selling, general and administrative expenses for fiscal 1997
increased by $144.7 million over such expenses for fiscal 1996 and increased as
a percentage of net sales from 29.7% to 30.1%. The increase in the expense ratio
was primarily due to operating costs of ALLDATA and to costs of the Company's
commercial program.
Net interest expense for fiscal 1997 was $8.8 million compared with $2.0
million for fiscal 1996. The increase in interest expense was primarily due to
higher levels of borrowings.
AutoZone's effective income tax rate was 37.6% of pre-tax income for fiscal
1997 and 37.4% for fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 increased by $434.5 million or 24.0% over net sales
for fiscal 1995. This increase was due to a comparable store net sales increase
of 6% (which was primarily due to sales growth in the Company's newer stores and
added sales of the Company's commercial program), an increase in net sales of
$275.1 million for stores opened since the beginning of fiscal 1995 and net
sales for the fifty-third week of fiscal 1996. At August 31, 1996, the Company
had 1,423 stores in operation, a net increase of 280 stores, or approximately
26% in new store square footage for the year.
Gross profit for fiscal 1996 was $935.0 million, or 41.7% of net sales,
compared with $751.1 million, or 41.5% of net sales, for fiscal 1995. The
increase in gross profit percentage was due primarily to improved leveraging of
warehouse and delivery expenses, favorable results of store and distribution
center inventories and the added sales of higher margin ALLDATA products.
Operating, selling, general and administrative expenses for fiscal 1996
increased by $142.6 million over such expenses for fiscal 1995 and increased as
a percentage of net sales from 28.9% to 29.7%. The increase in the expense ratio
was primarily due to acquisition and operating costs of ALLDATA and to costs of
the Company's commercial program.
Net interest expense for fiscal 1996 was $2.0 million compared with interest
income of $0.6 million for fiscal 1995. The increase in interest expense was
primarily due to higher levels of borrowings.
AutoZone's effective income tax rate was 37.4% of pre-tax income for fiscal
1996 and 39.2% for fiscal 1995. The decrease in the tax rate was primarily due
to a reduction in state income taxes.
17
Liquidity and Capital Resources
The Company's primary capital requirements have been the funding of its
continued new store expansion program, the increase in distribution centers and
inventory requirements. The Company has opened 1,050 net new stores and
constructed four new distribution centers from the beginning of fiscal 1993 to
August 30, 1997. The Company has financed this growth through a combination of
internally generated funds and, to a lesser degree, borrowings. Net cash
provided by operating activities was $177.5 million in fiscal 1997, $174.2
million in fiscal 1996 and $180.1 million in fiscal 1995.
Capital expenditures were $297.5 million in fiscal 1997, $288.2 million in
fiscal 1996, and $258.1 million in fiscal 1995. The Company opened 305 net new
stores in fiscal 1997. Construction commitments totaled approximately $52
million at August 30, 1997.
The Company's new store development program requires significant working
capital, principally for inventories. Historically, the Company has negotiated
extended payment terms from suppliers, minimizing the working capital required
by its expansion. The Company believes that it will be able to continue
financing much of its inventory growth by favorable payment terms from
suppliers, but there can be no assurance that the Company will be successful in
obtaining such terms.
The Company anticipates that it will rely primarily on internally generated
funds to support a majority of its capital expenditures and working capital
requirements; the balance of such requirements will be funded through
borrowings. The Company has an unsecured revolving credit agreement with several
banks providing for borrowings up to $275 million. At August 30, 1997, the
Company had available borrowings under these agreements of $76.6 million.
At August 30, 1997, the Company had outstanding stock options to purchase
10,599,254 shares of Common Stock. Assuming all such options become vested and
are exercised, such options would result in proceeds of $210.3 million to the
Company. Such proceeds constitute an additional source for liquidity and capital
resources for the Company. For fiscal 1997, proceeds from sales of stock under
stock option and employee stock purchase plans were $14.6 million, including
related tax benefits.
Inflation
The Company does not believe its operations have been materially affected by
inflation. The Company has been successful, in many cases, in mitigating the
effects of merchandise cost increases principally due to economies of scale
resulting from increased volumes of purchases, selective forward buying and the
use of alternative suppliers.
Seasonality and Quarterly Periods
The Company's business is somewhat seasonal in nature, with the highest sales
occurring in the summer months of June through August, in which average weekly
per store sales historically have run about 20% to 30% higher than in the
slowest months of December through February. The Company's business is also
affected by weather conditions. Extremely hot or extremely cold weather tends to
enhance sales by causing parts to fail and spurring sales of seasonal products.
Mild or rainy weather tends to soften sales as parts' failure rates are lower in
mild weather and elective maintenance is deferred during periods of rainy
weather.
Each of the first three quarters of AutoZone's fiscal year consists of twelve
weeks and the fourth quarter consists of sixteen weeks (seventeen weeks in
fiscal 1996). Because the fourth quarter contains the seasonally high sales
volume and consists of sixteen weeks (seventeen weeks in fiscal 1996) compared
to twelve weeks for each of the first three quarters, the Company's fourth
quarter represents a disproportionate share of the annual net sales and net
income. For fiscal 1997 and 1996, the fourth quarter represented 35.2% and
37.0%, respectively, of annual net sales and 41.8% and 40.3%, respectively, of
net income.
Forward-Looking Statements
Certain statements contained in the Financial Review and elsewhere in this
annual report are forward-looking statements. These statements discuss, among
other things, expected growth, future revenues and future performance. The
forward-looking statements are subject to risks, uncertainties and assumptions
including, but not limited to competitive pressures, demand for our products,
the market for auto parts, the economy in general, inflation, consumer debt
levels and the weather. Actual results may materially differ from anticipated
results described in these forward-looking statements.
18
Consolidated Statements of Income
Year Ended
--------------------------------------------------
August 30, August 31, August 26,
1997 1996 1995
(52 Weeks) (53 Weeks) (52 Weeks)
--------------------------------------------------
(in thousands, except per share data)
Net sales $2,691,440 $2,242,633 $1,808,131
Cost of sales, including warehouse and delivery expenses 1,559,296 1,307,638 1,057,033
Operating, selling, general and administrative expenses 810,793 666,061 523,440
- ---------------------------------------------------------------------------------------------------------------------
Operating profit 321,351 268,934 227,658
Interest income (expense) net (8,843) (1,969) 623
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 312,508 266,965 228,281
Income taxes 117,500 99,800 89,500
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 195,008 $ 167,165 $ 138,781
=====================================================================================================================
Net income per share $1.28 $1.11 $0 .93
=====================================================================================================================
Average shares outstanding, including common
stock equivalents 152,535 151,238 149,302
=====================================================================================================================
See Notes to Consolidated Financial Statements.
19
Consolidated Balance Sheets
August 30, August 31,
1997 1996
-------------------------------------
(in thousands, except per share data)
Assets Current assets:
Cash and cash equivalents $ 4,668 $ 3,904
Accounts receivable 18,713 15,466
Merchandise inventories 709,446 555,894
Prepaid expenses 20,987 19,225
Deferred income taxes 24,988 18,608
------------------------------------------------------------------------------------------------------------
Total current assets 778,802 613,097
Property and equipment:
Land 243,587 190,660
Buildings and improvements 682,710 523,240
Equipment 267,536 248,275
Leasehold improvements and interests 45,667 36,708
Construction in progress 97,411 62,283
------------------------------------------------------------------------------------------------------------
1,336,911 1,061,166
Less accumulated depreciation and amortization 255,783 198,292
------------------------------------------------------------------------------------------------------------
1,081,128 862,874
Other assets:
Cost in excess of net assets acquired, net of accumulated amortization
of $8,084 in 1997 and $7,467 in 1996 16,570 17,187
Deferred income taxes 4,339 2,938
Other assets 3,178 2,301
------------------------------------------------------------------------------------------------------------
24,087 22,426
------------------------------------------------------------------------------------------------------------
$1,884,017 $1,498,397
============================================================================================================
Liabilities Current liabilities:
and Accounts payable $ 449,793 $ 401,309
Stockholders' Accrued expenses 122,580 104,909
Equity Income taxes payable 20,079 12,260
Short-term debt 94,400
------------------------------------------------------------------------------------------------------------
Total current liabilities 592,452 612,878
Long-term debt 198,400
Other liabilities 17,957 19,937
Commitments and contingencies (See notes G and I)
Stockholders' equity:
Preferred Stock, authorized 1,000 shares; no shares issued
Common Stock, par value $.01 per share, authorized 200,000 shares;
issued and outstanding 151,313 shares in 1997 and 150,137 shares in 1996 1,513 1,501
Additional paid-in-capital 249,853 235,247
Retained earnings 823,842 628,834
------------------------------------------------------------------------------------------------------------
1,075,208 865,582
------------------------------------------------------------------------------------------------------------
$1,884,017 $1,498,397
============================================================================================================
See Notes to Consolidated Financial Statements.
20
Consolidated Statements of Cash Flows
Year Ended
------------------------------------
August 30, August 31, August 26,
1997 1996 1995
(52 Weeks) (53 Weeks) (52 Weeks)
------------------------------------
(in thousands)
Cash flows from operating
activities:
Net income $ 195,008 $ 167,165 $ 138,781
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization
of property and equipment 77,163 62,919 47,733
Amortization of intangible
and other assets 658 622 616
Deferred income tax expense
(benefit) (7,781) 6,082 (7,240)
Net loss (gain) on disposals
of property and equipment (16) (735) 832
Net increase in accounts
receivable and prepaid
expenses (5,009) (7,564) (6,091)
Net increase in merchandise
inventories (153,552) (158,673) (61,687)
Net increase in accounts
payable and accrued expenses 66,155 94,916 64,666
Net increase in income taxes
payable 7,819 6,493 578
Net change in other assets
and liabilities (2,898) 2,930 1,880
---------------------------------------------------------------------
Net cash provided by
operating activities 177,547 174,155 180,068
Cash flows from investing
activities:
Capital expenditures (297,467) (288,182) (258,060)
Proceeds from disposals of
property and equipment 2,066 8,680 1,364
------------------------------------------------------------------------
Net cash used in investing
activities (295,401) (279,502) (256,696)
Cash flows from financing
activities:
Repayment of long-term debt (4,003) (249)
Net borrowings under debt
agreements 104,000 84,900 9,500
Net proceeds from sale of Common
Stock, including related tax
benefit 14,618 17,699 17,552
------------------------------------------------------------------------
Net cash provided by
financing activities 118,618 98,596 26,803
------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 764 (6,751) (49,825)
Cash and cash equivalents at
beginning of year 3,904 6,411 56,236
Beginning cash balance of pooled
entity 4,244
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 4,668 $ 3,904 $ 6,411
- ---------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid, net of interest
cost capitalized $ 8,779 $ 1,971 $ 160
Income taxes paid $ 109,681 $ 69,791 $ 81,862
See Notes to Consolidated Financial Statements.
21
Consolidated Statements of Stockholders' Equity
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------------------------------------------
(in thousands)
Balance at August 27, 1994 $1,454 $179,090 $347,833 $ 528,377
Net income 138,781 138,781
Sale of 1,635 shares of Common Stock under stock option and stock purchase plans 17 5,335 5,352
Tax benefit of exercise of stock options 12,200 12,200
-------------------------------------------
Balance at August 26, 1995 1,471 196,625 486,614 684,710
Net income 167,165 167,165
Equity of pooled entity (issued 1,697 shares) 17 20,936 (24,945) (3,992)
Sale of 1,386 shares of Common Stock under stock option and stock purchase plans 13 6,836 6,849
Tax benefit of exercise of stock options 10,850 10,850
-------------------------------------------
Balance at August 31, 1996 1,501 235,247 628,834 865,582
Net income 195,008 195,008
Sale of 1,176 shares of Common Stock under stock option and stock purchase plans 12 7,676 7,688
Tax benefit of exercise of stock options 6,930 6,930
-------------------------------------------
Balance at August 30, 1997 $1,513 $249,853 $823,842 $1,075,208
===========================================
See Notes to Consolidated Financial Statements.
22
Notes To Consolidated Financial Statements
Note A -- Significant Accounting Policies
Business: The Company is a specialty retailer of automotive parts and
accessories. At the end of fiscal 1997, the Company operated 1,728 stores in 32
states.
Fiscal Year: The Company's fiscal year consists of 52 or 53 weeks ending on
the last Saturday in August.
Basis of Presentation: The consolidated financial statements include the
accounts of AutoZone, Inc. and its wholly owned subsidiaries (the Company). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Merchandise Inventories: Inventories are stated at the lower of cost or
market using the last-in, first-out (LIFO) method.
Property and Equipment: Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Leasehold interests and improvements are
amortized over the terms of the leases.
Amortization: The cost in excess of net assets acquired is amortized by the
straight-line method over 40 years.
Preopening Expenses: Preopening expenses, which consist primarily of payroll
and occupancy costs, are expensed as incurred.
Advertising Costs: The Company expenses advertising costs as incurred.
Advertising expense, net of vendor rebates, was approximately $24,622,000,
$23,129,000 and $18,531,000 in fiscal 1997, 1996 and 1995, respectively.
Warranty Costs: The Company provides the retail consumer with a warranty on
certain products. Estimated warranty obligations are provided at the time of
sale of the product.
Financial Instruments: The Company has certain financial instruments which
include cash, accounts receivable, accounts payable and debt. The carrying
amounts of these financial instruments approximate fair value because of their
short maturities or variable interest rates.
Income Taxes: The Company accounts for income taxes under the liability
method. Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Cash Equivalents: Cash equivalents consist of investments with maturities of
90 days or less at the date of purchase.
Use of Estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Net Income Per Share: Net income per share of common stock is computed using
the weighted average number of shares of common stock outstanding during each
period, including common stock equivalents, consisting of stock options
calculated using the treasury stock method, when dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 requires dual presentation of basic earnings per share (EPS) and diluted EPS
on the face of all statements of earnings issued after December 15, 1997. Basic
EPS is computed as net earnings divided by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock-based compensation
including stock options. Assuming the Company had adopted the provisions of
SFAS No. 128, EPS as reported and pro forma for the last three fiscal years
would be as follows 1997 -- as reported: $1.28, basic: $1.29, 1996 -- as
reported: $1.11, basic: $1.13; 1995 -- as reported: $0.93, basic: $0.95. The
Company's reported EPS calculations are the same as pro forma diluted EPS.
Impairment of Long-Lived Assets: In fiscal 1997 the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Also, in general, long-lived
assets and certain identifiable intangibles to be disposed of should be reported
at the lower of carrying amount or fair value less cost to sell. This
pronouncement did not have a material effect on the Company's financial position
or results of operations.
Note B -- Accrued Expenses
Accrued expenses consist of the following:
August 30, August 31,
1997 1996
----------------------
(in thousands)
Medical and casualty
insurance claims $ 35,121 $ 33,800
Accrued compensation
and related payroll taxes 26,481 18,490
Property and sales taxes 27,161 21,485
Other 33,817 31,134
----------------------
$122,580 $104,909
----------------------
23
Note C -- Income Taxes
At August 30, 1997, the Company has net operating loss carryforwards (NOLs)
of approximately $13.3 million that expire in years 2000 through 2009. These
carryforwards resulted from the Company's acquisition of ALLDATA Corporation
(ALLDATA) during fiscal 1996. The use of the NOLs is limited to future taxable
earnings of ALLDATA and is subject to annual limitations. A valuation allowance
of $5,247,000 and $5,573,000 in fiscal 1997 and 1996, respectively, has been
recognized to offset the deferred tax assets related to those carryforwards. If
realized, the tax benefit for those NOLs will reduce income tax expense.
The provision for income taxes consists of the following:
Year Ended
-------------------------------------
August 30, August 31, August 26,
1997 1996 1995
-------------------------------------
(in thousands)
Current:
Federal $114,113 $86,469 $81,460
State 11,168 7,249 15,280
-------------------------------------
125,281 93,718 96,740
Deferred:
Federal (6,427) 5,531 (6,160)
State (1,354) 551 (1,080)
-------------------------------------
(7,781) 6,082 (7,240)
-------------------------------------
$117,500 $99,800 $89,500
=====================================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
August 30, August 31,
1997 1996
------------------------
(in thousands)
Deferred tax assets:
Insurance reserves $12,078 $11,282
Unearned income 5,620 6,296
Net operating loss carryforwards 5,247 5,573
Property and equipment 1,901
Other 9,728 5,767
------------------------
34,574 28,918
Less valuation allowance 5,247 5,573
------------------------
29,327 23,345
Deferred tax liabilities:
Property and equipment 1,799
------------------------
Net deferred tax assets $29,327 $21,546
A reconciliation of the provision for income taxes to the amount computed by
applying the federal statutory tax rate of 35% to income before income taxes
is as follows:
Year Ended
----------------------------------
August 30, August 31, August 26,
1997 1996 1995
----------------------------------
(in thousands)
Expected tax at statutory rate $109,378 $93,438 $79,898
State income taxes, net 6,379 5,070 9,230
Other 1,743 1,292 372
----------------------------------
$117,500 $99,800 $89,500
==================================
Note D -- Financing Arrangements
During December 1996, the Company executed an agreement with a group of
banks for a $275 million five-year unsecured revolving credit facility to
replace the existing revolving credit agreements. The rate of interest payable
under the agreement is a function of the London Interbank Offered Rate (LIBOR),
or the lending bank's base rate (as defined in the agreement), or a competitive
bid rate, at the option of the Company. At August 30, 1997, the Company's
borrowings under this agreement were $198.4 million and the weighted average
interest rate was 5.79%. At August 31, 1996, revolving credit borrowings were
$94.4 million and the weighted average interest rate was 5.67%. The unsecured
revolving credit agreement contains a covenant limiting the amount of debt the
Company may incur relative to its total capitalization. Based on the term of the
Company's new five-year credit facility, amounts outstanding under the revolving
credit facility have been classified as long-term.
On March 27, 1997, the Company executed a negotiated rate unsecured
revolving credit agreement totaling $25 million which extends until March 26,
1998. There were no amounts outstanding under this agreement as of August 30,
1997.
Interest costs of $2,119,000 in fiscal 1997, $2,416,000 in fiscal 1996, and
$981,000 in fiscal 1995 were capitalized.
24
Note E -- Equity
The Company has granted options to purchase common stock to certain employees
under various plans at prices equal to the market value of the stock on the
dates the options were granted. Options are generally exercisable over a three
to seven year period, and generally expire in 10 years. A summary of outstanding
stock options is as follows:
Wtd. Avg. Number
Exercise Price of Shares
---------------------------------
Outstanding August 26, 1995 $14.77 9,503,981
Assumed 4.46 221,841
Granted 28.50 1,621,395
Exercised 4.55 (1,332,588)
Canceled 24.38 (254,873)
---------------------------------
Outstanding August 31, 1996 17.96 9,759,756
Granted 22.69 2,707,370
Exercised 4.93 (1,032,989)
Canceled 25.54 (834,883)
---------------------------------
Outstanding August 30, 1997 $19.84 10,599,254
=================================
The following table summarizes information about stock options outstanding at
August 30, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Exercise No. of Exercise Contractual No. of Exercise
Price Options Price Life (in years) Options Price
- -------------------------------------------------------------------------------------------------------------------
$1.00 -- 20.13 4,163,226 $10.15 5.13 2,619,363 $4.99
22.69 -- 25.25 4,069,178 24.89 7.49
25.75 -- 35.13 2,366,850 28.19 8.40
- -------------------------------------------------------------------------------------------------------------------
$1.00 -- 35.13 10,599,254 $19.84 6.77 2,619,363 $4.99
===================================================================================================================
Options to purchase 2,619,363 shares at August 30, 1997, and 2,901,140 shares
at August 31, 1996, were exercisable. Shares reserved for future grants were
4,199,055 shares at August 30, 1997, and 725,363 at August 31, 1996.
The Company adopted the disclosure requirement of SFAS No. 123, "Accounting
for Stock-Based Compensation," issued in October 1995. In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly no
compensation expense for stock options has been recognized. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at the grant date prescribed in SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below. The effects of applying SFAS No. 123 and the results obtained
through the use of the Black-Scholes option pricing model in this pro forma
disclosure are not indicative of future amounts. SFAS No. 123 does not apply to
awards prior to fiscal 1996. Additional awards in future years are anticipated.
Net Income 1997 1996
-----------------------
($000) As reported $195,008 $167,165
Pro forma $191,118 $165,992
Earnings
per share As reported $1.28 $1.11
Pro forma $1.26 $1.10
The weighted-average fair value of the stock options granted during fiscal
1997 and 1996 was $9.26 and $12.25, respectively. The fair value of each option
is estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted-average assumptions for grants in 1997 and
1996: expected price volatility of .34; risk-free interest rates ranging from
5.7 to 5.98 percent; and expected lives between 3.75 and 7.75 years.
The Company also has an employee stock purchase plan under which all eligible
employees may purchase Common Stock at no less than 85% of fair market value
(determined quarterly) through regular payroll deductions. Annual purchases are
limited to $4,000 per employee. Under the plan, 308,141 shares were sold in
fiscal 1997 and 226,541 shares were sold in fiscal 1996, including 168,362 and
173,572 shares, respectively, purchased by the Company for sale under the plan.
No shares of Common Stock are reserved for future issuance under this plan.
25
Note F -- Pension Plan
Substantially all full-time employees are covered by a defined benefit pension
plan. The benefits are based on years of service and the employee's highest
consecutive five-year average compensation.
The Company's funding policy is to make annual contributions in amounts at
least equal to the minimum funding requirements of the Employee Retirement
Income Security Act of 1974.
The following table sets forth the plan's funded status and amounts recognized
in the Company's financial statements (in thousands):
August 30, August 31,
1997 1996
-------------------------
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$22,005 in 1997 and $17,225 in 1996 $26,886 $20,400
=========================
Projected benefit obligation
for service rendered to date $42,687 $31,533
Less plan assets at fair value, primarily stocks
and cash equivalents 39,598 27,367
-------------------------
Projected benefit obligation in excess
of plan assets 3,089 4,166
Unrecognized prior service cost (289) (427)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions (3,721) (3,470)
Unrecognized net asset 118 268
-------------------------
Accrued (prepaid) pension cost $(803) $537
=========================
Net pension cost included the following components (in thousands):
Year Ended
-------------------------------------
August 30, August 31, August 26,
1997 1996 1995
-------------------------------------
Service cost of benefits earned
during the year $6,034 $4,580 $3,536
Interest cost on projected benefit
obligation 2,496 1,748 1,367
Actual return on plan assets (5,616) (3,677) (1,289)
Net amortization and deferral 2,820 2,518 481
-------------------------------------
Net periodic pension cost $5,734 $5,169 $4,095
=====================================
The actuarial present value of the projected benefit obligation was determined
using weighted-average discount rates of 7.94% and 7.93% at August 30, 1997 and
August 31, 1996, respectively, and assumed increases in future compensation
levels of 6%. The expected long-term rate of return on plan assets was 9.5%, 7%
and 7% at August 30, 1997, August 31, 1996 and August 26, 1995, respectively.
Prior service cost is amortized over the estimated average remaining service
lives of the plan participants, and the unrecognized net experience gain or loss
is amortized over five years.
Note G -- Leases
A portion of the Company's retail stores and certain equipment are leased.
Most of these leases include renewal options and some include options to
purchase and provisions for percentage rent based on sales.
Rental expense was $39,078,000 for fiscal 1997, $30,626,000 for fiscal 1996
and $26,460,000 for fiscal 1995. Percentage rentals were insignificant.
Minimum annual rental commitments under non-cancelable operating leases are as
follows (in thousands):
Year Amount
------------------------
1998 $35,096
1999 31,760
2000 29,164
2001 24,861
2002 15,097
Thereafter 66,716
------------------------
$202,694
========================
Note H -- Related Party Transactions
Management fees of $272,000 for fiscal 1996 and $371,000 for fiscal 1995 were
paid to KKR Associates (KKR), which directly and through several limited
partnerships, of which it is a general partner, owned approximately 13% of the
Company's outstanding Common Stock at August 30, 1997 and August 31, 1996. There
were no management fees paid to KKR during fiscal 1997.
Note I -- Commitments and Contingencies
Construction commitments, primarily for new stores, totaled approximately $52
million at August 30, 1997.
The Company is a party to various claims and lawsuits arising in the normal
course of business which, in the opinion of management, are not, singularly or
in aggregate, material to the Company's financial position or results of
operations.
The Company is self-insured for workers` compensation, automobile, general and
product liability losses. The Company is also self-insured for health care
claims for eligible active employees. The Company maintains certain levels of
stop loss coverage for each self-insured plan. Self-insurance costs are accrued
based upon the aggregate of the liability for reported claims and an estimated
liability for claims incurred but not reported.
Note J -- Business Combination
On March 29, 1996, ALLDATA became a wholly owned subsidiary of AutoZone in a
stock-for-stock merger, accounted for as a pooling of interests. Under the terms
of the merger agreement, AutoZone issued approximately 1.7 million shares of
Common Stock and stock options covering approximately 200,000 shares of Common
Stock. Financial information of ALLDATA has been included in the results of
operations from the date of acquisition. Financial statements for periods prior
to the date of combination have not been restated as the effect is not material
to the Company's financial condition and results of operations. The assets and
liabilities of ALLDATA were approximately $17.4 million and $21.4 million,
respectively, at the date of combination.
26
Management's Report
AutoZone's management takes responsibility for the integrity and
objectivity of the financial statements in this annual report. These financial
statements were prepared from accounting records which management believes
fairly and accurately reflect the operations and financial position of AutoZone.
The financial statements in this report were prepared in conformity with
generally accepted accounting principles. In certain instances, management used
its best estimates and judgments based upon currently available information and
management's view of current conditions and circumstances.
Management maintains a system of internal controls designed to provide
reasonable assurance that assets are protected from improper use and accounted
for in accordance with its policies and that transactions are recorded
accurately in the Company's records. The concept of reasonable assurance is
based upon a recognition that the cost of the controls should not exceed the
benefit derived.
The financial statements of AutoZone have been audited by Ernst & Young
LLP, independent auditors. Their accompanying report is based on an audit
conducted in accordance with generally accepted auditing standards, including a
review of internal accounting controls and financial reporting matters.
/s/ Robert J. Hunt
Robert J. Hunt
Executive Vice President - Finance
Chief Financial Officer
Customer Satisfaction
Corporate Information
Transfer Agent and Registrar Auditors
First Chicago Trust Company of New York Ernst & Young LLP
P.O. Box 2500 Memphis, Tennessee
Jersey City, New Jersey 07303-2500
(800) 756-8200 Store Support Center
(201) 324-0498 123 South Front Street
Memphis, Tennessee 38103-3607
Stock Exchange Listing (901) 495-6500
New York Stock Exchange
Ticker Symbol: AZO AutoZone Web Site
http://www.autozone.com
Report of Independent Auditors
Stockholders
AutoZone, Inc.
We have audited the accompanying consolidated balance sheets of AutoZone,
Inc. as of August 30, 1997 and August 31, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended August 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AutoZone, Inc.
at August 30, 1997 and August 31, 1996, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended August 30, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 19, 1997
Annual Meeting
The Annual Meeting of Stockholders of AutoZone will be held at 10:00 a.m. on
December 18, 1997, at AutoZone's store support center, 123 South Front Street,
Memphis, Tennessee.
SEC Form 10-K/Quarterly Reports
AutoZone does not produce quarterly reports because the information is not
timely and is costly to distribute. Stockholders may obtain free of charge a
copy of the Company's annual report on Form 10-K as filed with the Securities
and Exchange Commission or our quarterly press releases by writing to
Stockholder Relations, P.O. Box 2198, Memphis, Tennessee 38101.
Copies of all documents filed by the company with the Securities and Exchange
Commission, including Form 10-K and Form 10-Q, are also available at the SEC's
EDGAR server at http://www.sec.gov.
Stockholders of Record
As of September 30, 1997, there were 3,330 stockholders of record, excluding the
number of beneficial owners whose shares were represented by security position
listings.
27
OFFICERS SENIOR VICE PRESIDENTS
CUSTOMER SATISFACTION
Johnston C. Adams Jr.
Chairman and CEO Gerald E. Colley
Customer Satisfaction Stores
Timothy D. Vargo Harry L. Goldsmith
President and COO General Counsel
Customer Satisfaction and Secretary
Anthony D. Rose Jr.
Advertising
Stephen W. Valentine
Chief Information Officer
Systems Technology
& Support
David J. Wilhite
Merchandising
EXECUTIVE VICE PRESIDENTS
CUSTOMER SATISFACTION
Lawrence E. Evans
Store Development
Robert J. Hunt
Chief Financial Officer
Shawn P. McGhee
Merchandising
VICE PRESIDENTS
CUSTOMER SATISFACTION
Richard F. Adams Jr. Mark D. Hamm
Merchandising Analysis Systems Technology
& Support & Support
Michael B. Baird Phillip J. Jackson
Stores Distribution
David W. Barczak Michael E. Longo
Real Estate Distribution
Jon A. Bascom William R. McCawley Jr.
Systems Technology Stores
& Support
Steven R. McClanahan
B. Craig Blackwell Stores
Stores
Grantland E. McGee Jr.
Francis C. Brown III Stores
Human Resources
John Minervini
Michael E. Butterick Business Development
Controller
David W. Nichols
William L. Cone Stores
Loss Prevention
Robert F. Osswald
Brett D. Easley AutoZoner Development
Merchandising Systems & Training
Tara C. Elliot William C. Rhodes
Treasurer Operations Analysis
& Support
William D. Gilmore
Store Design & Construction Richard C. Smith
Stores
Frank B. Goodman
Business Planning Dennis P. Tolivar Sr.
& Analysis Stores
Clifford E. Green
Merchandising
OTHER CORPORATE OFFICERS
CUSTOMER SATISFACTION
Emma Jo Kauffman
Assistant Treasurer
Donald R. Rawlins
Assistant Secretary
BOARD OF DIRECTORS
Johnston C. Adams Jr. John E. Moll(1)
Chairman and CEO Retired President
Customer Satisfaction The Fleming Companies, Inc.
Timothy D. Vargo George R. Roberts
President and COO Member
Customer Satisfaction Kohlberg Kravis Roberts
& Co. LLC
James F. Keegan(1*, 2)
Chairman Andrew M. Clarkson (3*)
Staff Line, Inc. Chairman
Finance Committee
Michael W. Michelson(3) Customer Satisfaction
Member
Kohlberg Kravis Roberts Dr. N. Gerry House(2)
& Co. LLC Superintendent
Memphis City Schools
Robert J. Hunt
Executive Vice President Ronald A. Terry(1, 2*)
and CFO Retired Chairman
Customer Satisfaction First Tennessee
National Corporation
Joseph R. Hyde III
Former Chairman and CEO
Customer Satisfaction
(1) Audit Committee
(2) Compensation Committee
(3) Finance Committee
(*) Committee Chairman
28
[PHOTO OF PITT HYDE APPEARS HERE]
Pitt Hyde was convinced that the lessons of value and customer service he'd
learned in the grocery business could be applied to the automotive aftermarket
with great results. Eighteen years later, there's little question he was right.
As chairman and CEO of AutoZone, Pitt guided the company he founded to
be the leading auto parts chain in the country. He started by establishing a
strong culture that revolved around the people on both sides of the parts
counter. For our customers, his vision was to make AutoZone the best customer
service provider in the business. For AutoZoners, Pitt wanted them to know what
it was like to be part of a winning team and to understand how their efforts
contributed to AutoZone's growth.
Creating this culture wasn't easy, but seeing the impact it's had on
AutoZone's success is. Today, there are more than 28,000 AutoZoners carrying the
culture forward -- a testament to Pitt's ability to spread his ideas throughout
the organization.
[PHOTO OF PLAQUE STATING:
J.R. HYDE III
STORE SUPPORT CENTER
DEDICATED TO PITT HYDE,
THE FOUNDER OF AUTOZONE,
WHOSE PASSION FOR CUSTOMER SATISFACTION
IS AN INSPIRATION TO AUTOZONERS EVERYWHERE.
MAY 8, 1997
APPEARS HERE]
The relentless pursuit of the ultimate customer service experience is
a passion that lives on at AutoZone. He's taught us well. Pitt retired as
chairman in March. In his honor at a companywide meeting of store managers in
May, we renamed our headquarters building -- the J. R. Hyde III Store Support
Center. Yet, the biggest tribute we can pay him is to continue to find new ways
to amaze our customers.
[PHOTO OF MAN CHECKING TRUCK ENGINE APPEARS HERE]
[AUTOZONE(R) LOGO APPEARS HERE]