Autozone (AZO) is the U.S. leading retailer and a leading distributor of automotive parts and accessories. The company is active in the U.S. and Mexico and is considering expanding in Brazil after measuring the profitability in a few test stores. Autozone has been adding about 200 new stores every year in the last few years and has reached a total of 5006 stores .
The company has less than doubled its earnings in the last nine years, which is not a performance to boast about. However, as mentioned in my previous article, the special feature of this company has been its aggressive rate of share repurchases; it has reduced its outstanding shares by 58%, from 88.7 M to 37.0 M, and thus it has more than quadrupled its EPS during the nine-year period, from $5.34 to $23.48 . Even better, in the last five years the annual EPS growth has accelerated to 20%-25%. The share price of Autozone has followed its EPS and has almost quadrupled in the last nine years.
It is remarkable that Autozone exhibited unique self-confidence during the great recession of 2009, when it continued purchasing its shares relentlessly even though almost all companies interrupted their buyback programs in order to preserve their cash. The big question is whether the company can continue purchasing its shares at the above mentioned exceptional rate.
The first alarm is that the current assets of the company, $3.0 B, are much lower than its current liabilities, $3.7 B. Therefore, the company should allocate 70% of its expected net income of 2013 (about $1 B) to pay its current liabilities and hence only $300 M will be available for share repurchases, which means that the company will be able to purchase only 3% of its shares this year.
Another red flag is the book value of the company, which has dived deeply into negative territory. More specifically, the book value has declined from a positive $0.4 B in 2003 to a deep negative $1.6 B in 2012, which is minus $43 per share! I was really surprised when I discovered this in the balance sheet of the company, as I do not know any healthy company with such a negative book value.
Moreover, the same-store sales in Q4-2012 were only 2% higher year on year. The company cited the warm weather as a possible factor for its disappointing results but this remains to be ascertained in the coming quarters. Nevertheless, it would be prudent for the company not to keep increasing its debt based on hopes for a pronounced increased in its revenue.
To sum up, Autozone has achieved its amazing rate of share buybacks and its resulting EPS growth by stretching its debt beyond any limits. Therefore, the company cannot sustain its exceptional EPS growth, as it has to perform a great deleverage. If Autozone continues to ignore reality and maintains its current rate of share buybacks, it will greatly increase the risk of facing bankruptcy at the first headwind that will show up (e.g. higher interest rates). Although I cannot predict the future, I can guarantee that a headwind will occur at some point, as it occurs to every single company. Unfortunately, the management has not shown any signs of landing to reality and hence the worst-scenario is becoming more probable.
Note: If one wants to have exposure in the sector, then one can purchase shares of Advance Auto Parts (AAP). The company has tripled its earnings in the last nine years and has purchased 1/3 of its shares during this period. Hence it has almost quintupled its EPS while it has maintained a positive book value and a tolerable amount of debt, about seven times its annual earnings. Therefore, Advance Auto Parts combines exposure to the sector with pronounced share buybacks and low risk.