The purpose of investing is to efficiently allocate society's resources to generate the greatest long-term sustainable returns.
The purpose of this newsletter is to deliver the greatest level of insights (understanding) in the most efficient manner.
The rankings are simply a tool to help society's resource allocators (you) spot the most attractive investments in the auto retail sector.
Auto Retail Stocks Performance
On July 10, 2006 I announced the AutoRetailStocks.com rankings.
So here we are exactly one year later. And since that time:
· The AutoRetailStocks.com index is up 25.9%
· The Dow Jones Industrial Average is up 23.1%
· S&P 500 is up 21.0%
· The "elite 5" ranked stocks are up 5.1%
· The "top ten" ranked stocks are up 10.2%
You deserved better stock picking from me.
I will work harder.
Below is how the stocks performed over the last year. . .
Keep in mind this is the full year performance from July 7, 2006. Some of the companies moved in and out of the top ten and elite 5. So companies like LKQ dropped down the list as the stock performed well. And companies like GPI were moved up on the list as the stock underperformed.
Also, Hertz's stock performance is based on the date it was added to the autoretailstocks.com index (close of market January 31, 2007). Adesa was previously on the list and appreciated 4.6% between July 7, 2006 until when it was removed (January 31, 2007).
Comparable Metric #1: Investment Yield
To put this into some perspective, a 10% "earnings yield" would be 10x on a price/earnings (p/e) multiple basis. An 8% earnings yield equals a 12.5x p/e, and a 5% earnings yield is 20x.
Now professional investors will tell you earnings yield and p/e multiple valuation approaches are overly simplified forms of analysis. Sadly, I see more problems with discounted cash flow analysis (particularly with many of the auto retail companies due to their volatile working capital swings) and economic value added (where you "double count" risk).
I have said many times before. . .
At the end of the day, guess what direction the earnings are headed (which ultimately drive cash flows and return on invested capital), and you should achieve superior returns. Guess wrong, and you will achieve subpar returns.
Based on the current "earnings yields" you can see that so far I have not guessed all that wrong on the earnings side of the equation. Only the market doesn't believe the earnings.
In this situation, I have found that two things eventually happen. Either,
1) Investors guessed wrong and the companies with "high earnings yields" did not see their earnings go down, and the stock prices move up, or
2) Earnings guidance comes down, proving investors right, washing out the last of the "bullish investors," inviting a bunch of shorts (who catch the headlines), and setting the stage for positive surprises in the quarters to come.
In either case, I think the names toward the top of the index are therefore closer to the bottom than the top. At a time when I think investment expectations have become overly optimistic (throughout the U.S. equity markets), I think this group of names provides a pretty attractive risk/reward. Because I don't think investors expect a lot out of most of them (hence why they tend to have the higher earnings yields).
Why I ranked the stocks in this manner
#1: Lithia (NYSE:LAD)
Lithia remains in the top spot. It would be too easy to walk away and miss out on something great.
I still believe the company has the potential to become the next "Best Buy" of the auto retail world. The integration efforts and vision at Lithia are to be commended.
But I am not going to hide my disappointment in management.
I said last year in the fourth quarter that if Lithia was still in the same spot a year from now, well then "we've got a problem."
Every industry data point suggests to me that Lithia should be turning the corner, so we'll see how the second quarter of 2007 came out.
But beyond the recent performance (something I don't like to get caught up in), I worry management has lost focus. I think they are chasing too many initiatives, and falling short of deploying shareholder resources efficiently.
Management has already stated that L2 (the "CarMax" type) used vehicle stores are not an "experiment" but something they are committed to for the next ten years. And while I discouraged them from going ahead with L2, I will commend them for "sticking to their guns."
The biggest problem with every retailer who has tried and failed with an L2 type concept is that they backed out at the first sign of trouble. Only CarMax stuck to their guns and it seems to be building momentum (now that they've got the system down).
Having said that, they need to keep L2 to only the three experimental stores. They owe it to shareholders to prove they have a working model before they deploy any more resources on this initiative.
And this brings me to an even more important topic. As you probably saw from Friday's note (and you will notice in the comparable metrics later in this email), over the last six years Lithia's store productivity, floor plan per vehicle, and employee productivity metrics have not been anything to brag about. In fact, they are outright embarrassing.
And I can't explain away the poor store productivity metrics (like I can with the Penske Automotive Group) because the strategy changed (where Penske went into the U.K., changing the mix to smaller stores). Lithia has held to its strategy of buying underperforming dealerships in rural markets.
Now the strategy seems to have changed a bit to increase their foreign/luxury mix. And I have no problem with this shift.
But until management can begin showing that they bring something to the table when they acquire a store, I think shareholders should demand an immediate "cease and desist."
Don't get me wrong, management should continue a strategy of "portfolio enrichment," shedding underperforming stores and buying stores with attractive brands in markets that fill in the company's footprint better (where they can get economies of scale). Sonic Automotive has been following this strategy for the last few years and it has been highly successful.
But shareholders should insist that management not grow its total store base by more than 3% - 5% a year until they have proven they are achieving incremental returns.
If management does not announce on their next conference call that they will slow their expansion strategy (to the 3% - 5% level) while they focus on improving the stores they already have, shareholders should be VERY upset.
#2: Group 1 (NYSE:GPI)
A solid company as former Ford finance guys shift the model from aggregation to integration (from a holding company to an operating company). Investors got really excited last year as management began to demonstrate the results of their integration initiatives (and maybe a benefit from hurricane rebuild efforts in the Gulf States).
The stock was up 80% over the six months leading up to the rankings. And a lot of times when you have that much enthusiasm about a stock over such a short time period, any hint of growth slowing, and the stock gets hurt.
Ok, so the "momentum" is gone, and now we are left with a really attractive investment yield. With a solid management team that I think is doing a lot of things right.
#3: Asbury Automotive (NYSE:ABG)
CEO Ken Gilman is gone, so I don't like that.
But the new CEO Charles Oglesby seems to be doing a lot of things right too. And you've still got the rest of the team in place. Combined with over a 9% earnings yield and the highest dividend in the space (over 3%), I think the risk-reward remains attractive.
#4: Sonic Automotive (NYSE:SAH)
Here again, you've had a management change.
I think Sonic always had a great operational leader in Jeff Rachor. But they lacked a return on capital focus. David Cosper (CFO and recently promoted Vice Chairman) brought such a return on investment focus to the organization. And Voilla, a 40%+ increase in the stock over the last 12-months.
Now the only question becomes can Scott Smith and his two divisional Chiefs carry on the company's tradition of operational excellence with Jeff Rachor now gone?
I am going to keep betting they can. And with an earnings yield of 8.6% and 1.6% dividend yield, I think the risk-reward is pretty attractive.
So why did it move down in the rankings?
And the answer is simply the 40%+ stock price appreciation versus some of the other names (that did not do as well in the court of investment opinion).
This should be the goal of the rankings.
Spot good companies where the fundamentals have not changed, and move them up and down the rankings as the psychology of the market shifts.
The challenge is making sure that the fundamentals have not changed (when they are on top), and recognizing when something has changed in the organization (when they are toward the bottom).
#5: Pep Boys (NYSE:PBY)
Two words: Jeff Rachor
But beyond his leadership abilities, I think there is an emerging opportunity to add real value to the consumer and consolidate share among top repair chains. Incidentally this is why I added Midas to the top ten rankings. And even why I get excited about Monro, Genuine Parts and O'Reilly (but I'll get to that soon enough).
For the last several months you have heard me say that repair chains should begin offering free inspections/certifications of older used vehicles.
The service repair market (along with franchised dealers) has been one of the last bastions of auto retail that has yet to truly consolidate share. This is because the businesses are highly people intensive.
I still think the franchised dealers are moving in the right direction. And at some point over the next five years, likely because of some "economic event," this vision for consolidation will become clearer.
But I have been a little more skeptical of the service repair market. And the reason is because at the root of the repair business lies a simple brokering of people's time. Someone needs a brake job. How much do I pay the mechanic versus how much do I charge? Oh and then I double the part price. So essentially your "cost of goods" is people, the labor itself. And people are a pretty difficult "commodity" to benefit from size or scale (because they are not a commodity).
Sure you can get a little benefit from centralized accounting and administrative functions. But you lose so much the more distant management gets from the mechanics. Because entrepreneurs who run and own the shop just have more at stake and tend to be better managers of the mechanics.
And if you're a public company? Ad in Sarbanes Oxley and investor relations expenses and you've probably offset the accounting/administrative economies of scale.
But certifying used vehicles I think can CHANGE THE GAME ENTIRELY. Because I think it can truly create a competitive advantage for repair shops being a part of an organization that is bigger than themselves.
Don't get me wrong there are a lot of criticisms to trying to create some inspection/certification program. But franchised dealers initially scoffed (made fun of) the idea of certifying late model (so 2 - 5 year old) used vehicles. "We're just paying to certify what dealers should do with the used vehicle in the first place." I was often told.
And now? Certified used vehicle sales seem a prime focus at just about every franchised dealer in America. In fact, according to the Automotive News Data Center, through the first five months of 2007 there were a total of 710,290 certified used vehicles sold versus the 690,876 sold in the first five months of 2006. That's an increase of nearly 8% in a total used vehicle market that is supposedly down considerably (recall earlier pieces about how I am little suspect of the reported declines in used unit volumes based on registration data).
But clearly certified used vehicles continue to gain share and momentum.
And now I think the time has come for older used vehicles to have some sort of consistent inspection/certification process (that goes way beyond what SGS offers on Ebay).
Please don't misunderstand me. None of the management teams of the large repair chains have said they will pursue this idea/strategy. But as I have written and told people in the industry, I think the large repair chains should begin offering such a program.
Because 8+ year old vehicles represent more than half of the vehicles on the road, over 100 million, and I estimate about 20 million of them change hands every year (used vehicle sales). Sure it would make it easier for used dealers to sell certified older used vehicles. But since used dealers are almost all independent locations themselves, who will stand behind the certification?
This is where CarMax has had such an advantage with their ValueMax vehicles. And it is where I think national repair shop chains can have a REAL competitive advantage and bring a real value proposition to independent used car dealers. Because a national chain can stand behind the quality of the work, helping to create a greater sense of security for someone buying a used vehicle either online, from a private party, or an independent dealer. Not to mention the benefit it creates for extended warranty providers.
I estimate the reconditioning market alone is $12+ billion for these 8+ year old vehicles. And when you add in the customer retention opportunity repair shops would get from a free inspection/certification program, the incremental market opportunities seem incredibly untapped.
As a result, I think some sort of used vehicle inspection/certification program is an idea whose time has come. And regional and national chains like Monro, Midas, Pep Boys, and even the NAPA Auto Care Centers and O'Reilly Certified shops all should benefit.
So when I look at a "down and out" company like Pep Boys, despite its run in stock price over the last year (the stock price and corporate returns are still well below historical levels), with a new leader who I have really come to respect over the years, and an emerging new market opportunity, I think it becomes worth taking the risk and throwing Pep Boys into the elite 5.
#6: Penske Automotive Group (formerly UnitedAuto) (NYSE:PAG)
Here again, a solid company that consistently oscillates (moves back and forth) between the elite 5 and top ten. If you want the definition of a leader, I don't think you need to look much further than Roger Penske.
But I think a lot of the "low hanging fruit" in the United Kingdom has been gobbled up by the major consolidators., which is what I think has really allowed Penske Automotive to perform better than its peers on a number of metrics (like same-store sales).
And I think a lot more integration needs to be done with its operations in the United States.
Similar to Lithia, I believe focus is the greatest concern for Penske.
From having stores on multiple continents to being the primary distributor for the Smart vehicles coming to the U.S., the leadership at Penske Automotive just has its hands in a lot of pots.
Not to mention all of the related businesses Mr. Penske and others within the Penske Corporation are engaged in: Penske Automotive, Penske Truck Leasing, Penske Motor Group, Penske Logistics, VM MOTORI, Truck Lite, QEK Global Solutions, DAVCO, and of course Penske Racing (all owned by Penske Corp).
Having said that. I am warming to the possibilities the Smart vehicle distributorship will bring to the Penske organization. To a certain extent I think it can help them become better retailers. Because they are getting to launch a dealer group from scratch. And over the years, what they learn from Smart (particularly what they are learning from the internet) I think can transfer over to the company's dealerships at large.
And speaking of the internet. . . As Mr. Penske discussed on the company's second quarter conference call, the ability to use the Penske name on the internet I think will create considerable advantages for the organization going forward.
#7: Genuine Parts (NYSE:GPC)
Outstanding management team (in my opinion).
I still think the industrial segment is a hidden gem with a lot of opportunities as manufacturing plants outsource more of their maintenance and repair operations [MRO].
But I think their core "independent jobbers" are in a tough spot. These are basically the independent auto parts store owners who sell parts "on the spot" (like Domino's Pizza) to repair shops. They use the NAPA (National Auto Parts Association) name on their stores, and benefit from all of the systems Genuine Parts and NAPA provide.
The systems and help from Genuine Parts and NAPA include everything from helping the store owner's decide the best merchandise layout (what parts and products go where) to information technology and warranty programs.
So how does Genuine Parts get paid? Well, Genuine parts is the primary warehouse auto parts distributor to NAPA members (they own and operate 58 out of the 64 warehouses that distribute to NAPA members ). So in return for all of the help from Genuine Parts and NAPA, the store owners buy a good chunk of the auto parts (that the store owners sell to repair shops) from Genuine Parts. I look at it as being similar to a franchise without the formal franchise agreement (more like a handshake).
And as you have heard me discuss on numerous occasions, I think the core demand for "hard automotive parts" is in decline, while the competitive environment intensifies (as do-it-yourself auto part stores have overexpanded/saturated the market). I just don't believe the industry data can accurately capture the hundreds of thousands of different stock keeping units (SKUs) out there, and this is why you see the Automotive Aftermarket Industry Association's historical figures change every year.
And the auto parts distribution model itself needs to be streamlined. Ask management about "drop shipments" and you'll quickly recognize that the days of having a part go from manufacturer, to warehouse distributor, to sometimes another warehouse distribution center, to an auto parts/jobber store, to the repair shop, and finally ending up on the customers vehicle is no longer the most efficient model. People are slowly figuring out how to get it more directly (on a timely basis) to the customer without so many links in the chain.
So the number of independently owned NAPA auto parts stores is likely to decline (in my opinion).
But there is a silver lining, and it should leave bright analysts with some interesting questions about what Genuine Parts looks like in 10 years from now.
The opportunity, or silver lining, I am referring to are the NAPA Auto Care Centers.
What are the NAPA Auto Care Centers?
The NAPA Auto Care Centers are a relatively new program being offered to independent service repair shops. Similar to the deal Genuine Parts and NAPA offer independent auto parts store owners. Genuine Parts and NAPA provide systems and support, and in return the repair shops are expected to buy more of their parts from NAPA stores. They have over 13,000 repair shops signed up for the program.
Above (with Pep Boys) you heard me discuss my vision for national repair chains to begin consolidating share of the market with national certification programs. I think NAPA Auto Care Centers can begin offering the same thing, and by default encouraging shops to participate in the NAPA Auto Care Center program.
If repair chains do begin offering these certifications, when you combine rising labor, parts, and just downright higher administrative costs, the independent repair shop is going to find it increasingly difficult to compete on their own. They need a NAPA Auto Care or some other systems provider (like Midas or O'Reilly Certified) to give the repair shop owners the tools so they can focus on what they do best (fixing the vehicles).
As I have discussed in the past, the ultimate value proposition Genuine Parts brings to the table are systems that empower the entrepreneur. So the NAPA Auto Care Centers seem like a natural outgrowth of what the company is already really good at (empowering entrepreneurs). And a tremendous opportunity (in my opinion).
So I put some thought to it (which is always dangerous), and started to ask myself: What if Genuine Part were to create a more formalized franchise program for the NAPA Auto Care Centers?
Keep in mind, it is not as easy as it sounds. You have probably walked into a dozen gas stations that were part of the NAPA Auto Care Center program and not even known it unless you looked at the little sticker on the window. And the reason is because a gas station combined with a repair shop (like a Shell or BP) already is "franchised," prominently displaying the Shell or BP logo. So a NAPA Auto Care logo would compete with the gas stations existing franchise.
So I don't know the percent of NAPA Auto Care Centers that are stand alone repair shops or shops that would have conflicts (like the gas stations I described above). But I know Midas generated $10,506 in operating income per store (mostly franchised) in 2006. And if Genuine Parts were able to do something similar, $10,506 times 13,000 NAPA Auto Care Centers works out to $137 million in operating income.
And to put this into some perspective. . . Genuine Parts generated a total of $399.9 million in operating income in the automotive segment in 2006. So while the $137 million potential is admittedly a stretch, the point I am making is that the opportunity with this program is much bigger than I think investors realize.
The question this leaves us with, however, is how does Genuine Parts best empower the entrepreneur?
Maybe it means they continue to own more of the independent NAPA auto parts stores to ensure consistency and quality of parts distribution to their NAPA Auto Care repair shop members.
So far, it appears this is exactly what they are doing. I mean heck, in 1993 Genuine Parts had a total of 654 company owned NAPA (jobber) stores in the U.S. Last year they had 1,100. And at the same time, they have gone from their warehouses serving 5,069 independently owned jobbers in the U.S. in 1993 to 4,800 last year.
Incidentally I think this is one reason why you have seen more consistent revenues out of Genuine Parts Automotive segment versus many of the auto parts stores, because Genuine Parts has shifted its mix toward more company owned stores.
And I expect the trend to continue. Because I suspect it is a pretty good chunk of their automotive segment's profits. Here's what I mean. . .
I figure Genuine Parts does about $1.4/$1.5 million in revenues per company-owned store. This works out to about $1.5 billion to $1.7 billion in company-owned store revenues. About 30% of Genuine Parts total automotive segment's revenues. Probably the closest "comparable" retailer to the NAPA company owned stores is O'Reilly Auto Parts (both have 50% to 60% of their sales coming from commercial repair shop customers).
Now we don't know what the operating income per company-owned NAPA store is because Genuine Parts sales to independent distributors are thrown into the same segment (and the independent jobbers are more like 70% sales to commercial repair shops). But I can tell you that O'Reilly does about $172,000 in operating income per store (at least in 2006). So if Genuine Parts company-owned NAPA stores generate a similar operating income per store to what O'Reilly generates, Genuine Part's probably makes close to $190 million of its operating income from company owned stores (almost half of the automotive segment's entire operating profits in 2006).
So the question becomes at some point, does Genuine Parts start to separate its NAPA Auto Care Business from its NAPA Auto Parts business?
Right now, the two units are seen as mutually beneficial. Signing up more NAPA Auto Care Centers should drive more business into the NAPA Auto Parts stores. But I think down the road, what the company may find is that they have two businesses where the sum of the parts are worth more than the whole (and I'll leave it up to the sell side and investment banking community to figure out what I mean by that).
#8: Keystone Auto (KEYS-OLD)
Take the NAPA Auto Care program I just described above and now imagine Keystone offering something similar. Specifically, as I have discussed in the past, a "Keystone Certified Repair Shop Program." Keystone has more than 25,000 collision repair shop customers that it sells generic "body shop" type parts to. Just imagine the potential?
And once again, this is not anything management has said they will do, only what I encourage them to do.
Because similar to the independent repair shop, collision/body shops are getting squeezed by the insurance companies direct repair programs (DRPs). They desperately need organizations that can bring systems and processes to help make them more efficient, and I think Keystone is in a prime position to begin offering such systems and processes (and in return those shops agreeing to buy more parts from Keystone).
The risk of course remains automaker resistance to generic parts being used in collision repairs. And don't think I am being paranoid by constantly bringing this issue up. Most of you know about the current patent challenge/lawsuit going on with the International Trade Commission [ITC] brought by Ford Motor Company. And of course before the ITC issue was the lawsuit in Illinois that prompted State Farm to stop using generic parts several years ago (even though the ruling has since been overturned) that seriously hurt Keystone's results.
But if you roam around old 10ks (annual reports) enough you find some interesting things. Like in Keystone's 10-k for the year ended December 31, 2000 where it talks about how the company was sued by Ford Motor Company in 1987 for misrepresenting the quality of aftermarket parts being sold by Keystone for Ford automobiles. And in 1992, Keystone reached a settlement, which included the company agreeing, along with its insurance companies, to finance a one-year corrective advertising campaign conducted by Ford using Keystone's name.
The point I am making is that the automakers, particularly Ford Motor Company, and other forces have consistently tried to block the growth of alternative (generic) parts being used in collision repairs. And sometimes they succeed. While I think it only slows a longer term trend of what is in the best interest of the customer, it is a risk investors need to be constantly aware of. Because it has seriously hurt the company on at least two specific occasions in the past, and could very well hurt them again.
Beyond the party spoilers (a.k.a automaker resistance), while I know management a little less than some of the other teams, I have been impressed with them so far. Combined with a considerable opportunity I see for Keystone to add real value to the collision shops (with this certified shop idea), and a 5% earnings yield, it is a risk/reward I still think is attractive.
#9: O'Reilly Auto Parts (NASDAQ:ORLY)
While David O'Reilly is no longer CEO and they have a new CFO, I continue to admire the culture that exists at O'Reilly and hope management carries on the tradition.
Importantly, I think O'Reilly has invested in the appropriate infrastructure, and now you are seeing the benefits of leverage. Operating income per store is up 28% since 2000 and operating income per employee is up 101%.
The company now averages 10.5 employees per store (all in including corporate and distribution centers) versus 16.4 employees per store in 2000. They simply have been able to add more stores and revenues than people and costs, which in my book is pretty cool.
Aside from the management transition, my only real concern involves the demand for hard parts and over expansion that I think has occurred throughout auto parts store space (i.e. AutoZone, Advance, etc).
But a solid business model that continues to gain momentum (leverage), an emerging opportunity with the company's certified repair shop program (similar to NAPA Auto Care), and nearly a 5% earnings yield is a pretty attractive risk/reward in my book.
#10: Midas (NYSE:MDS)
Granted the company announced a big lawsuit against them last night, so who knows what that means for the company. But the dollars being asked for in the suit seem excessive (albeit far from me to give a legal opinion).
Keeping that new risk in mind, I think Midas story is improving. You've heard my opinion about the opportunity I think repair shops have to begin offering inspections/certifications of older used vehicles. The real question should be why wouldn't I put Monro in the #10 slot then? Especially since Monro owns all of their stores and therefore can ensure greater consistency and quality versus Midas working through the franchise system. To be honest, it was a tough call.
But Monro only has a regional platform (in the Northeast) whereas Midas has a national footprint, I think creating greater opportunities for a national certification branding program (assuming they can get the franchisees to play along).
And, as you heard me discuss with Genuine Parts and Pep Boys, I just think independent repair shops themselves are increasingly going to find it difficult to compete without someone (like Midas) providing them systems and support. So the ability to sign up new franchisees should improve now that they have proven to their current franchisees that they are focused on the franchisees (versus trying to become a warehouse distributor).
So I think you get a little better growth (return on investment) opportunity with Midas versus Monro right now. But like I said, it was a tough call.
Not Ranked [NR] - LKQ Corp (LKQX):
I think LKQ is a very well run company and I have a developed a tremendous amount of respect for management over the years. It is why LKQ was ranked in the Elite 5 for a good chunk of the year. And similar to Keystone, I think LKQ can add real value if they begin offering some "LKQ Certified" Shop program for their collision customers.
But the stock has had a good run (up 35%) while the risks have increased a bit (in my opinion). Just like Keystone, LKQ is exposed to the same risks with the automaker resistance to generic parts. And the company has been pretty aggressive on the acquisition front, which combined with some eroding facility productivity metrics (more recently) I think creates the potential for some "indigestion" problems.
With only a 4% earnings yield, the risk versus reward just becomes a little too much for me. And so I'll eagerly await a more attractive return potential should the psychology of the market (investors) provide it.
Management Succession Plan Survey
One of the things I said last quarter that I did not do a very good job at was understanding succession planning at each company. This sent those of us in the investment community into near "panic" mode on a number of occasions throughout the year as key executives announced their departure, and we quickly had to guess: "ok what does this mean for the company's prospects going forward?"
So as promised, I tried to spend this quarter getting a better understanding of the succession plans at each of the companies in the autoretailstocks.com index. Specifically, I asked each management team:
If something were to happen (sickness, death, or just departure) to cause one or all of the top 3 senior executives in the company to no longer serve the shareholders, does the board of directors have someone specifically identified to replace those individuals?
I told the management teams it only required a yes or no, but they could elaborate as much as they wanted.
Here are the responses I received back:
Lithia Motors (LAD)
"Not if all 3 went at once. Yes if any one of them left. "
Source: Sid DeBoer, CEO, Lithia Motors
Sonic Automotive (SAH)
"We have spent some time internally considering how to respond to your question regarding specific succession planning without sharing more than what we've told others in the marketplace. We can tell you that Sonic's Board of Directors has engaged in succession planning. However, because the succession plan could be deemed material non-public information regarding our company, we are not comfortable responding to your specific question as to whether the Board has specifically identified an individual to replace each of the top 3 executive officers. I will also tell you that we are undertaking a slightly less formal process throughout the organization with key dept heads, GM's, etc. Thank you for your understanding of our position on this."
Source: Greg Young, Chief Accounting Officer, Sonic Automotive
Group 1 Automotive (GPI)
"Group 1 believes that succession planning is an important component in the oversight of our business. At the request of our Board, some time ago we began work on a structured process to succession planning that includes the top three members of our management team as well as regional and dealership general manager positions. While this is an ongoing process, we have identified some internal candidates that might replace one or more of the top three positions in the event of a separation. "
Source: John Rickel, CFO, Group 1 Automotive
Asbury Automotive (ABG)
"The board regularly engages in succession planning."
Source: Allen Levenson, Vice President, Sales and Marketing
Penske Automotive (formerly UnitedAuto Group) (NYSEARCA:UAG)
"Yes we have succession plans that specifically identify names in the boxes of who could replace executives."
Source: Tony Pordon, Sr. Vice President, Penske Automotive (formerly UnitedAuto Group)
Genuine Parts (GPC)
"Yes, we have succession planning in place. And it goes all the way down to the individual business units. "
Source: Jerry Nix, CFO, Genuine Parts, and Sid Jones, Director of Investor Relations, Genuine Parts
O'Reilly Auto Parts (ORLY)
Source: Tom McFall, CFO, O'Reilly Auto Parts
LKQ Corp (LKQX)
Source: Joseph Holsten, CEO, LKQ Corp.
Source: Rick Keister, CEO Keystone Auto
Pep Boys (PBY)
"I would say no, but I believe the Board of Directors was waiting to get a CEO in place and now have every intention of addressing succession responsibly through the Board of Director's HR committee."
Source: Jeff Rachor, CEO, Pep Boys
Monro Muffler Brake (NASDAQ:MNRO)
"We have people identified to fill in while the board decides."
Source: Catherine D'Amico, CFO Monro Muffler Brake Inc.
America's Car-Mart (NASDAQ:CRMT)
Did not respond
Celeste Gunter, Investor Relations, said they were working on a response, but I never heard back.
But CarMax shortly thereafter issued an 8-k (June 29, 2007), that I think gives us somewhat of an answer. The 8-k included amendments and changes to its bylaws, which included a discussion of the Nominating and Governance Committee.
Specifically, it said the function of the committee shall include the following:
(f) Review top management organization and assist the CEO in determining that the Corporation has adequate depth and breadth of management both to carry out its expansion programs and to provide for succession in the event of retirement or the unanticipated departure of a key executive. As part of this responsibility, the Nominating and Governance Committee will review periodically, with input from the Chief Executive Officer, (a) candidates to assume the position of Chief Executive Officer and other designated senior management positions, including succession planning for the CEO in the event of an emergency, death, or resignation, and (b) the development and/or recruitment plans for internal and external candidates for such positions. The results of these reviews shall be reported to the Board of Directors, which shall have ultimate responsibility for the selection of the Chief Executive Officer and planning for management succession.
Source: CarMax 8-k, June 29, 2007, Section 3.5
So it sounds like they are working toward a "yes."
"We have a plan in place"
Source: Marc Cannon, Head of Public Relations, AutoNation
"Absolutely Yes. Of course, the Board reserves the right to not accept senior management's succession plan, but it would be rare. Rhodes was the top of the succession plan at the time of Odland's departure."
Source: Brian Campbell, Director of Investor Relations, Treasurer
Advance Auto Parts (NYSE:AAP)
No response. But in all fairness they have an interim CEO from their board of directors as they search for a new CEO. Advance's sudden CEO departure with no replacement was one of the key company's that inspired the survey.
CSK Auto Parts (CAO)
"Our Board periodically considers succession planning at the top management levels, but actual succession plans necessarily depend on the facts and circumstances at the time, which often change. So in answer to your question, yes we are always aware of succession planning, but the plan must be fluid enough to properly address the facts and circumstances."
Source: Brenda Bonn, Manager, Investor Relations, CSK Auto Parts
"Yes, Midas does have in place a succession plan for senior officers, which has been approved by the company's board of directors. "
Source: Bob Troyer, Director of Investor Relations
"Jerry, it would not be appropriate for us to comment on a Hertz Global Holdings' board of directors action but I can tell you that we have a lot of long tenured people in our organization. This gives us bench strength across our business segments and in the corporate organization."
Source: Lauren Babus, Staff Vice President, Investor Relations, Hertz
Did not respond.
And now, on to the rest of the metrics. . .
Comparable Metric #2: Revenue Per Employee
Comparable Metric #3: Revenue Per Store (facility/location)
Comparable Metric #4: Gross per employee
Comparable Meric #5: Gross per Store (facility/location)
Comparable Metric #6: Operating Income Per Employee
Comparable Metric #7: Operating Income Per Store (facility/location)
A reminder about comparable metrics
As I discussed Friday, you should keep in mind every company has a slightly different way they treat costs. For example, Monro Muffler Brake and Pep Boys include rent expense in cost of goods sold (kind of conventional for repair shops), while most of the other auto retail establishments include rent in selling, general and administrative (SG&A) expenditures.
When you combine different accounting treatments with varying geographies and product/service compositions (vehicle brands, private label products, labor versus a physical good, etc.), I would be very careful with trying to compare one company's productivity versus another company even if they appear to be in a similar business (i.e. do-it-yourself auto parts store, franchised dealer, etc).
Instead, I would encourage you to focus on the year-over-year change (improvement or deterioration) one company was able to demonstrate versus another company. Even with this approach there are risks. Keep in mind accounting treatment and even business strategies have a way of changing over the course of six years. This is especially true when you consider the franchised dealers or any other organization that has reported discontinuing operations where "history has changed."
But it is the best we have to go by.
Also, just yesterday CSK filed their 10-k restating financial statements for fiscal 2007. As you can tell, this took a little longer to compile than one day, and so I used their fiscal 2006 10-k restatement. I will review the new data and at a later date adjust accordingly.