This report analyzes Advance Auto Parts (“Advance”) and AutoZone, two leading auto parts retailers. Both firms have faced the same difficult economic conditions in the past couple of years, but they are today in much different financial positions. While Advance is generally a moderately successful company, AutoZone has experienced significant debt management problems. Both firms have been forced to stretch their working capital in order to make ends meet in the face of depressed demand.
This report analyzes the two companies in terms of their basic operations, their financial statements, their financial ratios and the basic trends in their financial data. In the ...view middle of the document...
• Customer Satisfaction scores increased from 65 to 73 in DIY and 60 to 64 in Commercial
• Team Member Engagement scores increased from 65 to 75
• Team Member retention improved to 66% from 61%
In AutoZone’s 2010 letter to stockholders, they’ve also noted success in a challenging environment. They had double-digit EPS growth for every quarter of the year. In fact they have recorded sixteen consecutive quarters of double-digit earnings-per-share growth. Their same store sales increased 5.4% in 2010 (versus last year’s 4.4% sales increase over a comparable 52 week period in fiscal 2008, which excludes a fifty third week of financial results). Also, their operating profit increased 12.2% versus 2009’s comparable 7.2% increase. And, their earnings per share increased 27.6% versus 2009’s comparable basis of 19.7%. They’ve also produced record operating cash flow of $1.196 billion, up from $924 million last year, and Return on Invested Capital (ROIC) reached a new all-time high of 27.6% versus last year’s 24.4%.
The 10-K does not contain a management discussion of the firm. In both cases, a description of the nature of the business is included.
Part II: According to the balance sheet, Advance has cash, receivables, inventories, property, goodwill and other assets. The most important to the company is the property, which is around one-third of all assets and forms the base of the company’s distribution channel for its service. AutoZone’s balance sheet is similar – cash, receivables, inventories, property, land, equipment and goodwill with property being the most significant component of the balance sheet at 45% of the net book value of assets. Advance uses LIFO to measure inventories; AutoZone uses FIFO. Both companies use the straight line method of depreciation. Both companies incorporate an allowance for doubtful accounts into their calculations of accounts receivable. A/R for both firms is based on “net”.
The bulk of the liabilities for Advance are accounts payable. The firm has a low level of long-term debt. There are no areas of concern with respect to Advance’s liabilities due to the company’s low degree of leverage. Accounts payable grew 22% in 2009, but long-term debt was cut in half. AutoZone’s most significant class of liabilities is long-term debt, followed closely by accounts payable. While the company can meet its long-term obligations, the fact that it has allowed its accounts payable to grow so large in relation to its current assets is a point of concern. With AutoZone there were no significant changes, as the accounts payable level was already high and it grew 14.8%. Neither company appears to have any usual commitments or contingencies – Advance has no off-balance sheet commitment and AutoZone only has $131,277 in standby letters of credit.
Common Size Income Statement
Advance Auto Parts
Net Sales 5412623 100% 5142255 100%
Cost of sales 2768397 51% 2743131...