AutoZone 2007 Annual Report Download

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Our Pledge Starts With
Our Customers
2007 Annual Report

Table of contents

  • Page 1
    Our Pledge Starts With Our Customers 2007 Annual Report

  • Page 2
    ... light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products. Many stores also have a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair...

  • Page 3
    ...in overall customer service levels. In fiscal 2007, we completed another large merchandising initiative. We added over $70 million of new, mainly late-model, hard parts to our product assortment. This inventory was added to allow us to say "yes" more frequently to our Retail and Commercial customers...

  • Page 4
    ... to open 163 new AutoZone stores across the United States and Puerto Rico to finish the year with 3,933 domestic stores. We continue to believe we can open new stores at a mid-single digit growth rate, and we continue to see opportunities for new store expansion across virtually all of our markets...

  • Page 5
    ... parts coverage is better than it's ever been! By adding over $70 million in incremental, mainly late model, hard parts coverage to our stores, we are positioned to say "yes" more often to both our Commercial and Retail customers. Our continued focus on developing cutting edge technology has helped...

  • Page 6
    ... training of our store AutoZoners and ongoing refinement of our category management process. And, we're committed to growing our Commercial business in fiscal 2008. We're committed to building and enhancing a sales culture designed to satisfy the demanding needs of our professional customers...

  • Page 7
    AutoZone, Inc. 2007 Form 10-K

  • Page 8
    ... of 1934 For the transition period from _____ to _____. Commission file number 1,10714 (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) ! ! (I.R.S. Employer Identification No.) Address of principal executive offices) (Zip Code...

  • Page 9
    ... which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter was $8,723,547,564. The number of shares of Common Stock outstanding as of October 15, 2007, was 64,914,833...

  • Page 10
    ...Item 1. Business ...5 Introduction...5 Marketing and Merchandising Strategy ...6 Commercial...7 Store Operations...7 Store Development...8 Purchasing and Supply Chain ...9 Competition...9 Trademarks and Patents ...9 Employees...9 AutoZone Website ...10 Executive Officers of the Registrant ...10 Item...

  • Page 11
    ... are subject to a number of risks and uncertainties, including without limitation, competition; product demand; the economy; credit markets; the ability to hire and retain qualified employees; consumer debt levels; inflation; weather; raw material costs of our suppliers; energy prices; war and the...

  • Page 12
    ... and repair software. On the web at www.autozone.com, we sell diagnostic and repair information, auto and light truck parts, and accessories. We do not derive revenue from automotive repair or installation services. At August 25, 2007, our stores were in the following locations: Alabama ...Arizona...

  • Page 13
    ... Clutches CV Axles Engines Fuel Pumps Mufflers Shock Absorbers & Struts Starters Water Pumps Antifreeze & Windshield Washer Fluid Belts & Hoses Chemicals, including Brake & Power Steering Fluid, Oil & Fuel Additives Fuses Lighting Oil & Transmission Fluid Oil, Air, Fuel & Transmission Filters...

  • Page 14
    ... to local, regional and national repair garages, dealers and service stations in the United States. As a part of the program we offer credit and delivery to our commercial customers. The program operated out of 2,182 stores as of August 25, 2007. Through our hub stores, we offer a greater range of...

  • Page 15
    ...merchandising information and improved inventory control. We believe the Store Management System also enhances customer service through faster processing of transactions and simplified warranty and product return procedures. %#' 7#*) (% The following table reflects store development during the past...

  • Page 16
    ...,me ("DIFM") auto parts and accessories markets. Competitors include national and regional auto parts chains, independently owned parts stores, wholesalers and jobbers, repair shops, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores...

  • Page 17
    ... is at http://www.autozone.com. We make available, free of charge, at our investor relations website, http://www.autozoneinc.com, our annual report on Form 10,K, quarterly reports on Form 10,Q, current reports on Form 8,K and amendments to those reports filed or furnished pursuant to Section 13...

  • Page 18
    ... same,store sales. $' 3 B$ 7+4+ )*7#: , At the end of fiscal 2007, our consolidated employee count was approximately 55,000. We cannot assure that we can continue to hire and retain qualified employees at current wage rates. If we do not maintain competitive wages, our customer service could...

  • Page 19
    ...and DIFM auto parts and accessories markets. Competitors include national, regional and local auto parts chains, independently owned parts stores, jobbers, repair shops, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores, supermarkets...

  • Page 20
    ... centers servicing our stores, of which approximately 1.3 million square feet is leased and the remainder is owned. Our distribution centers are located in Arizona, California, Georgia, Illinois, Ohio, Tennessee, Texas and Mexico. Our primary store support center, which we own, is located in Memphis...

  • Page 21
    ... its California subsidiaries. The San Diego County District Attorney later joined the suit. The lawsuit alleges that AutoZone failed to follow various state statutes and regulation governing the storage and handling of used motor oil and other materials collected for recycling or used for cleaning...

  • Page 22
    ...fiscal 2005 from employees electing to sell their stock under the Company's Third Amended and Restated Employee Stock Purchase Plan, qualified under Section 423 of the Internal Revenue Code, under which all eligible employees may purchase AutoZone's common stock at 85% of the lower of the market 15

  • Page 23
    price of the common stock on the first day or last day of each calendar quarter through payroll deductions. Maximum permitted annual purchases are $15,000 per employee or 10 percent of compensation, whichever is less. Under the plan, 39,139 shares were sold to employees in fiscal 2007, 51,167 shares...

  • Page 24
    ...domestic comparable store net sales(5) Average net sales per domestic store (in thousands) ...Average net sales per domestic store square foot ...Total domestic employees at end of year ...Merchandise under pay,on,scan arrangements (in thousands) Inventory turnover(6) ...After,tax return on invested...

  • Page 25
    9 ; " ' = ' ' 9*; % 9+; 88> ' $ 2 $ 7 7 ' & 88: ' %= = * 7 2 * 7 2 ' ' ; " $ ; -% $ 6 = 11 " ' $ ' %= = 7 7 + 1 $ ! 88 = ' / ' 97 / $' $ -% - $ $ $ * 7 2 * 7 2 $ 1 $ 1 $ * 4 94; 1 = 9 ...

  • Page 26
    ...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 provides commercial credit and prompt delivery of parts...

  • Page 27
    ... Share,Based Payments"). The remaining increase in expenses is driven by initiatives to improve the customer's shopping experience and higher occupancy costs driven largely by the opening of new stores. These initiatives continue to include expanded hours of operation, enhanced training programs and...

  • Page 28
    ... related to our new store development program and enhancements to existing stores and systems. In addition to the building and land costs, our new store development program requires working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers...

  • Page 29
    ... drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to...

  • Page 30
    ... expire within one year, but have automatic renewal clauses. In conjunction with our commercial sales program, we offer credit to some of our commercial customers. The majority of our receivables related to the credit program are sold to a third party at a discount for cash with limited 23

  • Page 31
    ... customer, such merchandise is not recorded on our balance sheet. Upon the sale of the merchandise to our customers, we recognize the liability for the goods and pay the vendor in accordance with the agreed,upon terms. Although we do not hold title to the goods, we do control pricing and have credit...

  • Page 32
    ... cumulative lease accounting adjustments recorded in the second quarter of fiscal 2005. (4) Average of the capital lease obligations relating to vehicle capital leases entered into at the beginning of fiscal 2007 is computed as the average over the trailing 13 periods. Rent expense associated with...

  • Page 33
    ... require significant estimation or judgment: % We state our inventories at the lower of cost or market using the last,in, first,out ("LIFO") method. Included in inventory are related purchasing, storage and handling costs. Due to price deflation on the Company's merchandise purchases, the Company...

  • Page 34
    ... physical inventory counts. # 1 7 AutoZone receives various payments and allowances from its vendors based on the volume of purchases or for services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and promotional funds. The amounts to be received are...

  • Page 35
    ... +,17#,$' , 3#$% '> % +,> AutoZone is exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, we use various financial instruments to reduce interest rate and fuel price risks. To date, based upon our current level of...

  • Page 36
    ...the quoted market prices for the same or similar debt issues or on the current rates available to AutoZone for debt...fuel swaps to economically hedge a portion of our diesel fuel exposure. These swaps were settled within a few days of each fiscal year end and had no significant impact on cost of sales...

  • Page 37
    % )! +( (1+ 7 % % ) (%, ( $**7 ) (% ': % ( 6 Management's Report on Internal Control Over Financial Reporting ...31 Reports of Independent Registered Public Accounting Firm ...32 Consolidated Statements of Income...34 Consolidated Balance Sheets ...35 Consolidated Statements of Cash Flows ......

  • Page 38
    ... with management's assessment, which is included in this Annual Report. '%+4+1 %+#(, ' 7 6D ' ) $ On January 12, 2007, the Company submitted to the New York Stock Exchange the Annual CEO Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual...

  • Page 39
    ... of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly...

  • Page 40
    ... of the Public Company Accounting Oversight Board (United States). 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...

  • Page 41
    ... of sales, including warehouse and delivery expenses ...Operating, selling, general and administrative expenses ...Operating profit...Interest expense, net...Income before income taxes ...Income taxes ...Net income ...Weighted average shares for basic earnings per share ...Effect of dilutive stock...

  • Page 42
    ...Cash and cash equivalents...$ Accounts receivable ...59,876 80,363 Merchandise inventories ...2,007,430 1,846,650 116,495 100,356 Other current assets...2,270,455 2,118,927 Total current assets...Property and equipment: Land ...625,992 588,444 1,720,172 1,566,002 Buildings and improvements...780,199...

  • Page 43
    ... from exercise of stock options...Deferred income taxes ...Income from warranty negotiations ...Share,based compensation expense ...Changes in operating assets and liabilities: Accounts receivable ...Merchandise inventories ...Accounts payable and accrued expenses...Income taxes payable ...Other...

  • Page 44
    ... SFAS 158, net of taxes of ($1,089) ...Purchase of 6,032 shares of treasury stock ...Retirement of treasury stock ...Sale of common stock under stock option and stock purchase plans ...Share,based compensation expense ...Income tax benefit from exercise of stock options...Balance at August 25, 2007...

  • Page 45
    ... and national repair garages, dealers and service stations. The Company also sells the ALLDATA brand automotive diagnostic and repair software. On the web at www.autozone.com, the Company sells diagnostic and repair information, auto and light truck parts, and accessories. +,1 7 ? '5 The Company...

  • Page 46
    ... for uncollectible accounts. AutoZone routinely grants credit to certain of its commercial customers. The risk of credit loss in its trade receivables is substantially mitigated by the Company's credit evaluation process, short collection terms and sales to a large number of customers, as well...

  • Page 47
    2+(2 1%+ +%+ ,5 AutoZone is exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, the Company uses various financial instruments to reduce such risks. To date, based upon the Company's current level of foreign ...

  • Page 48
    ... return rates. A portion of the Company's transactions include the sale of auto parts that contain a core component. The core component represents the recyclable portion of the auto part. Customers are not charged for the core component of the new part if a used core is returned at the point of sale...

  • Page 49
    ... which represents the difference between the grant date fair value and the employee purchase price. Total share,based expense (a component of operating, selling, general and administrative expenses) was $18.5 million related to stock options and share purchase plans for fiscal 2007 and $17.4 million...

  • Page 50
    .... AutoZone grants options to purchase common stock to certain of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options were granted. Options have a term of 10 years or 10 years and one day from grant date. Director options generally...

  • Page 51
    ... expense. & D = The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense. The Company generally issues new shares when options are exercised. A summary of outstanding stock...

  • Page 52
    ... owned insurance captive. The Company maintains certain levels for stop,loss coverage for each self,insured plan in order to limit its liability for large claims. The limits are per claim and are $1.5 million for workers' compensation, $500,000 for employee health, and $1.0 million for general, 45

  • Page 53
    ... warranties. In most cases, the Company's vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product's historical return rate...

  • Page 54
    ...has been established by the Company for credits subject to such expiration periods 2+(2 1%+ +%+ , AutoZone has utilized interest rate swaps to convert variable rate debt to fixed rate debt and to lock in fixed rates on future debt issuances. AutoZone reflects the current fair value of all interest...

  • Page 55
    ... of such exposure is limited to the unpaid portion of amounts due to the Company pursuant to the terms of the derivative financial instruments, if any. Although there are no collateral requirements, if a downgrade in the credit rating of these counterparties occurs, management believes that this...

  • Page 56
    ... from 30 basis points to 90 basis points, depending upon the Company's senior unsecured (non,credit enhanced) long,term debt rating. Based on AutoZone's ratings at August 25, 2007, the applicable percentage on Eurodollar loans is 35 basis points. The Company may select interest periods of one, two...

  • Page 57
    ...years of service and the employee's highest consecutive five,year average compensation. On January 1, 2003, the plan was frozen. Accordingly, pension plan participants will earn no new benefits under the plan formula and no new participants will join the pension plan. On January 1, 2003, the Company...

  • Page 58
    ...Other non,current assets...Current liabilities ......term investment return that meets the Company's pension plan obligations. Active management and alternative investment strategies are utilized within the plan in an effort to minimize risk, while realizing investment returns in excess of market...

  • Page 59
    ... of the plans...Contributions from measurement date to fiscal year,end ...Unrecognized net actuarial losses ...Unamortized prior service cost ...Net amount recognized... )#$(% 1#2(+G 4 +( (1+ 7

  • Page 60
    ... corporate bonds with cash flows that generally match our expected benefit payments in future years. The expected long,term rate of return on plan assets is based on the historical relationships between the investment classes and the capital markets, updated for current conditions. Prior service...

  • Page 61
    ... a detailed review of its accounting for rent expense and expected useful lives of leasehold improvements. The Company noted inconsistencies in the periods used to amortize leasehold improvements and the periods used to straight,line rent expense. The Company revised its policy to record rent for...

  • Page 62
    ... its California subsidiaries. The San Diego County District Attorney later joined the suit. The lawsuit alleges that AutoZone failed to follow various state statutes and regulation governing the storage and handling of used motor oil and other materials collected for recycling or used for cleaning...

  • Page 63
    #% E 2) (% *#'%+(2 The Company manages its business on the basis of one reportable segment. See "Note A - Significant Accounting Policies" for a brief description of the Company's business. As of August 25, 2007, the majority of the Company's operations were located within the United States. ...

  • Page 64
    ... 2.19 2.17 : $ 2,002,707 (0.2)% 1,004,344 378,369 340,279 217,175 3.26 3.23 $2$,% 61 *% * ' ,& ' % / Net sales ...Increase (decrease) in domestic comparable store sales ...Gross profit ...Operating profit...Income before income taxes ...Net income ...Basic earnings per share...Diluted earnings...

  • Page 65
    ... was performed under the supervision and with the participation of AutoZone's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of August 25, 2007. Based on that evaluation...

  • Page 66
    ... officer, chief accounting officer and persons performing similar functions. The Company has filed a copy of this Code of Ethical Conduct as Exhibit 14.1 to this Form 10,K. The Company has also made the Code of Ethical Conduct available on its investor relations website at http://www.autozoneinc.com...

  • Page 67
    ... , = The following information required under this item is filed as part of this report - / +( (1+ 7 % % ) (%, The following financial statements, related notes and reports of independent registered public accounting firm are filed with this Annual Report in Part II, Item 8: Report of Independent...

  • Page 68
    .... AUTOZONE, INC. By: /s/ William C. Rhodes, III William C. Rhodes, III Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: October 22, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons...

  • Page 69
    ... Inc. Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the Form 8,K dated September 28, 2007. Indenture dated as of August 8, 2003, between AutoZone, Inc. and Bank One Trust Company, N.A. Incorporated by reference to Exhibit 4.1 to the Form S,3 (No. 333,107828) filed August...

  • Page 70
    ... Compensation Plan. Incorporated by reference to Exhibit A to the Company's Proxy Statement dated October 27, 2004, for the Annual Meeting of Stockholders held December 16, 2004. 10.15 Credit Agreement dated as of December 23, 2004, among AutoZone, Inc., as Borrower, the Several Lenders from time...

  • Page 71
    ... Amended and Restated Executive Stock Purchase Plan. Incorporated by reference to Appendix B to the definitive proxy statement dated October 25, 2006, for the annual meeting of stockholders held December 13, 2006. 10.28 Agreement dated January 19, 2007, between AutoZone, Inc. and Bradley W. Bacon...

  • Page 72
    ... earnings Fixed charges: Gross interest expense Amortization of debt expense Interest portion of rent expense Total fixed charges Ratio of earnings to fixed charges $ 936,150 170,852 (1,376) $1,105,626 Fiscal Year Ended August 2006 2005 2004 (52 weeks) (52 weeks) (52 weeks) $ 902,036 156,976 (1,985...

  • Page 73
    ... AutoZone Development Corporation Nevada AutoZone Northeast, Inc. fka ADAP, Inc. New Jersey AutoZone Stores, Inc. Nevada AutoZone Texas, L.P. Delaware AutoZone West, Inc. fka Chief Auto Parts Inc. Delaware AutoZone.com, Inc. Virginia AutoZone Parts, Inc. Nevada AutoZone Puerto Rico, Inc. Puerto Rico...

  • Page 74
    :HFRQVHQWWRWKHLQFRUSRUDWLRQE\UHIHUHQFHLQWKHIROORZLQJ5HJLVWUDWLRQ6WDWHPHQWVRI$XWR=RQH,QFRIRXUUHSRUWVGDWHG 2FWREHUZLWKUHVSHFWWR$XWR=RQH,QF¶VFRQVROLGDWHGILQDQFLDOVWDWHPHQWVDQGWKHHIIHFWLYHQHVVRILQWHUQDOFRQWURO RYHUILQDQFLDOUHSRUWLQJRI$XWR=RQH,QF...

  • Page 75
    ...'s ability to record, process, summarize and report financial information; and (b)1 Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. October 22, 2007 /s/ WILLIAM C. RHODES, III...

  • Page 76
    ... management or other employees who have a significant role in the registrant's internal control over financial reporting. October 22, 2007 /s/ WILLIAM T. GILES William T. Giles Chief Financial Officer, Executive Vice President, Finance, Information Technology and Store Development (Principal...

  • Page 77
    ...; and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. (ii) October 22, 2007 /s/ WILLIAM C. RHODES, III William C. Rhodes, III Chairman, President and Chief Executive Officer (Principal Executive...

  • Page 78
    ... the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. (ii) October 22, 2007 /s/ WILLIAM T. GILES William T. Giles Chief Financial Officer, Executive Vice President, Finance, Information Technology and Store Development (Principal...

  • Page 79
    AutoZone, Inc. Corporate Information

  • Page 80
    ... Supply Chain Harry L. Goldsmith General Counsel and Secretary †Robert D. Olsen†Store Operations, Commercial and Mexico James A. Shea†Merchandising, Marketing and Supply Chain Senior฀Vice฀Presidents Customer฀Satisfaction Timothy W. Briggs Human Resources William W. Graves Supply...

  • Page 81
    ... Support Center, 123 South Front Street, Memphis, Tennessee. AutoZone Web Sites Investor Relations: http://www.autozoneinc.com Company Web Site: http://www.autozone.com Stock Exchange Listing New York Stock Exchange Ticker Symbol: AZO Auditors Ernst & Young LLP Memphis, Tennessee Code of Ethical...

  • Page 82
    123 South Front Street Memphis, Tennessee 38103-3607 (901) 495-6500 www.autozone.com