Auto-parts retailer AutoZone
Normally, you can give a company a pass when its comps sink once in awhile, particularly during its weakest quarter. It just stands to reason that do-it-yourself mechanics -- AutoZone's primary customer -- simply won't want to work on their cars as much in the cold weather. But this is endemic to AutoZone, and has been for several years now. Comps were basically flat in 2006, and they fell 2% the year before. They were up just 0.3% in the first quarter of the current fiscal year.
While Advance Auto Parts
If you look at its profits, you might be heartened by AutoZone's 15% jump in earnings per share. On its face, that's good, but the numbers are being propped up by continued and extended share buybacks. Don't get me wrong: Fools love stock buybacks to boost shareholder value. Yet rather than making capital improvements to its stores, AutoZone basically plows its otherwise prodigious cash-generating ability into buying back as many shares as it can.
This latest quarter saw the Motley Fool Inside Value recommendation buy back another $129 million worth of stock, and it authorized yet another $500 million buyback program for 2007. That's in addition to the $578 million repurchased in 2006, and the $427 million bought in 2005. Capital spending, on the other hand, dropped almost 13% for the quarter, and it's down 12% for the fiscal year to date. The company has also cut back on advertising. Instead, it has "refreshed" its stores, which management says is basically throwing up a new coat of paint. Essentially, its buybacks-at-any-cost program is similar: Net income was up 6% for the year, but looked much better on a per-share basis because of the buybacks. Such purchases aren't always the best use of cash.
The auto parts market is seasonal and fragmented. In addition to the competitors above, along with Pep Boys
AutoZone, as the largest of the bunch, has been able to increase its return on invested capital for shareholders for two straight quarters now, and it stood at 22.5% at the end of this quarter. Yet it's losing market share to competitors who are seeing better gains in sales and are able to keep customers returning. That's something a coat of paint simply can't whitewash.
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AutoZone is a recommendation of Motley Fool Inside Value. A 30-day guest pass lets you see why chief analyst Philip Durell believes AutoZone will still race ahead.