While some of auto parts retailer AutoZone's (NYSE:AZO) customers might be driving to the stores in cars that need a little TLC to stay on the road, there's no question about the kind of vehicles leaving corporate headquarters over the past few years -- armored trucks loaded with cash.
As a result, Fools thinking that they'd like to own shares of AutoZone might not always have that chance. This company has been one of the most committed buyers of its own stock that I've ever seen -- so committed, in fact, that the company's outstanding share count has been cut almost in half since 1998. I've never heard of a company taking itself private on an installment plan, but AutoZone is certainly giving it a good try.
Shareholders have definitely benefited. The company has managed to grow earnings per share at a compounded rate of roughly 25% while sales have compounded at a rate of less than 10% a year over the past six years. Though the company repurchased no shares in the past quarter (for the first time in many years), management did reaffirm its intention to buy back more shares in the next couple of quarters as seasonal cash flows trend higher.
Although sales in the fiscal second quarter were up only about 4% and same-store sales were flat, operating income grew just over 12%, and the company posted a 24% rise in EPS (net of a one-time tax adjustment). Not surprisingly, the company continued to improve its operating margins, although its margins and sales per square foot were already the envy of almost any comparable retailer.
As strange as it may sound, AutoZone may actually be a little too good at what it does. The company has focused so tightly on operating efficiency and cash flow generation, it may have sacrificed some of its growth in exchange for higher margins.
After all, high gas prices can't be the only reason that sales comparisons are tough for AutoZone. Advance Auto Parts (NYSE:AAP) competes in the same market and posted almost double-digit same-store growth in the December quarter, although with much lower operating margins. Of course, Advance Auto Parts has the advantage of growing from a smaller base, so a straight-up comparison is not completely fair.
Whatever the root cause, AutoZone is now taking steps to boost growth. The company is aggressively expanding the number of parts it offers in its stores and is increasing store-level inventories. AutoZone is also spending money to update stores and continues to expand its "pay-on-scan" program that allows the company to offer trendy (or, some might say, "faddish") merchandise with minimal inventory risk.
As I suggested in an earlier piece, investors should treat AutoZone something like a Cadillac -- a very high-quality vehicle that can take you places in style and safety but won't be breaking any speed records in doing so. Some investors may legitimately be put off by the company's high debt level and/or modest top-line growth, but investors who want to get in the zone of investing in strong cash flow producers -- especially ones that also return a lot of that cash to shareholders -- should take a further look at AutoZone.
Get your motor running with these other Foolish takes on the auto parts industry:
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned, and no mechanical "fix-it" capabilities whatsoever.
