AutoZone Inc. (NYSE: AZO), one of America’s leading retailers and distributors of automotive parts and accessories, has increased its borrowing capacity from $2.0 billion to $2.25 billion, according to the company’s recent SEC filings. The company’s decision came in response to recent price inflation on merchandise purchases, primarily driven by increased freight costs, which has led to a rise in its merchandise inventory costs.
As of May 6, 2023, AutoZone’s LIFO credit reserve balance stood at $89 million, up significantly from $15 million at the end of August 2022. The company’s policy is not to write up inventory in excess of replacement costs. However, due to the increased freight costs, the company has recorded a non-cash charge to its cost of sales as the LIFO credit reserve balance increased.
Amended Revolving Credit Facility
AutoZone has also amended and restated its existing revolving credit facility, which now allows the company to increase its maximum borrowing capacity under the Revolving Credit Agreement to $3.25 billion, subject to lenders’ approval. The Revolving Credit Agreement will now terminate on November 15, 2027, with the option for the company to request an extension for an additional one-year period.
The company’s debt at the end of the period ending May 6, 2023, was $7.34 billion, including long-term debt and discounts and debt issuance costs. This debt is comprised mostly of senior notes with various interest rates and maturity dates, as well as commercial paper with weighted average interest rates of 5.14% at the end of the same period.
The fair value of AutoZone’s debt was estimated at $7.1 billion as of May 6, 2023, based on the quoted market prices for similar issues or current rates available to the company. This indicates that the carrying value of AutoZone’s debt was $229.9 million more than the fair value of the debt. Additionally, the company’s borrowings under its Senior Notes contain minimal covenants, primarily restrictions on liens. The repayment obligations under these arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs.
Strong Performance in Auto Parts Stores Segment
It’s worth noting that AutoZone’s net sales for its Auto Parts Stores segment reached $4.02 billion for the twelve week period ending May 6, 2023, up from $3.80 billion for the same period in 2022. The company’s gross profit for the segment reached $2.10 billion, reflecting an increase from the $1.97 billion recorded in the same period in 2022.
In conclusion, AutoZone has taken strategic steps to boost its borrowing capacity as the company faces increased inventory costs due to rising freight charges in the current economic environment. The company’s strong performance in net sales and gross profit in its Auto Parts Stores segment indicates a positive future outlook, and with a robust revolving credit facility in place, AutoZone is well-positioned to manage its debt obligations and navigate any economic challenges ahead.
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