AutoZone Cash Conversion Cycle: A Competitive Advantage?

After reviewing the recent Advance Auto Parts (AAP) financial results that were released on November 11th, I was impressed by the same store sales growth of 4.7% that AAP was able to capture within this economy. With a quick scan, AAP competes in many aspects of my value scorecard and I will continue to evaluate this firm as a potential purchase of some common shares for my next investment.

In addition to the value scorecard, I reviewed the other competitors in this industry to see what other value plays are out there, including AutoZone Inc. (AZO) and O'Reilly Automotive, Inc (ORLY). The one metric that seems to show some variation in this competitive set is the cash conversion cycle. If you are not familiar with the cash conversion cycle, here is the definition (per Wikipedia):

In management accounting, the Cash Conversion Cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth.

With values of the last full year of results, you can see that AZO is significantly below the other companies in the industry of at least 100 days or more.

• AZO: 15.8 days
• AAP: 100.6 days
• ORLY: 137.7 days

This level of 15.7 days is a close comparative to the fast food industry, turning the inventory over so quickly with the majority of fast food customers paying in cash. My initial reaction is leaning towards ruling this as a competitive advantage for AZO, but I am perplexed of how the company has been able to influence its suppliers to accept such payment terms in the credit crunch world we live in. As long as the sales and store growth are there, suppliers are probably staying away from disrupting this apple cart. Be cautious of when the top line starts to slow, AZO can be put in a cash dilemma very quickly.

Disclosure: At the time of posting, I am not long nor short any stocks mentioned in this article (AZO, AAP, or ORLY).

Comments

[a. palmer jr.]

So, where does the profits go from AZO? Certainly not to the employees, from personal experience, they didn't pay dividends on their stock the last time I looked. Do you think the executives and higher-ups are keeping it like in the banking industry?

2009 Nov 15 10:24 AM

[GoochyPuppy]

@a.palmer jr: -- If it quacks like a duck...

2009 Nov 16 04:57 AM