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From the Survey: AutoZone
AutoZone (AZO) is a leading retailer and distributor of automotive replacement parts and accessories in the United States. As of August 31, 2013, the company had 4,836 stores in 49 states, the District of Columbia, Puerto Rico; 362 locations in Mexico; and three sites in Brazil. Each store carries an extensive product line for cars, SUVs, vans, and 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 credit and delivery services to local, regional, and national repair garages, dealers, service stations, and public sector accounts. AutoZone also has a strong online presence, through ALLDATA, AutoZone, AutoAnything, and AutoZonePro. At these websites, consumers can buy a wide variety of automotive parts and accessories, diagnostic and repair software, performance products, etc.
AutoZone has generated very strong sales growth over the past few years, fueled by a combination of aggressive store openings and an ongoing stock buyback plan. Indeed, the auto parts retailer has added about 200 locations a year over the past decade, though it only recently started tapping the relatively fertile markets of Mexico and Brazil. Same-store sales comparisons have also been good, as more and more Americans, Mexicans, and Brazilians are hanging on to their vehicles longer due to sluggish economic activity among other things. More recently, auto manufacturers have been much more aggressive, offering various promotional deals to get vehicles off the lots, and this has hurt same-store sales growth. Management is looking for ways to increase store traffic and drive this metric higher, however, and we think focusing on the commercial space could be key.
The company’s gross margins are consistently north of 50% and slowly climbing, thanks to the nature of the products it sells. What is more impressive is AutoZone does not derive revenue from automotive repair or installation. The company focuses on widening gross margins by reducing acquisition costs and carrying more inventory, which has led to expansion in each of the last 10 years. Operating margin expansion has been less predictable, given the costs associated with opening new stores at a breakneck pace, but the figure is gradually trending upwards. Again, management has kept a watchful eye on variable expenses and continually looks to cut costs.
AutoZone’s share-repurchase program is another large piece of this puzzle. The company uses all of its free cash flow to open stores, stock inventory, and buy back shares, and it leverages itself whenever cash flow proves insufficient. AutoZone has reduced the number of AZO shares outstanding by more than 55 million over the last 10 years, from roughly 89 million to approximately 34 million. Not surprisingly, this has really accelerated share-earnings growth, which has averaged just under 18% over the last decade. On the downside, the company maintains a shareholder deficit and negative book value, and the debt burden continues to widen. Also, the auto retailer does not pay a dividend to its shareholders. Still, we fully expect the buybacks to continue for the foreseeable future.
Investors have really taken to AZO shares, and we are not surprised that Wall Street is smitten with them. The stock price has more than quadrupled since 2003, from a high of $103 then to about $465 now. The equity also has a low Beta coefficient (.60 out of 1.00), meaning that volatility is not really a concern here.
Given AutoZone’s growth-oriented nature and cash deployment strategy, AZO shares are definitely not for everyone. That said, investors looking to ride the wave to the company’s recent success and those that favor share buybacks and aggressive growth above all else should consider this issue.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.