AZO - Autozone

[kab60]

RockAuto has been around since 1999. Amazon started selling car parts in 2006. Broadrun just posted a Q2 letter with a bit of the information you requested, flesh: http://broadrunllc.com/wp-content/uploads/2017/07/Q2-17-Sep-Acct-Letter-website.pdf

[DooDiligence]

Thanks, and the NVR POV was informative too (I like the way BK pivoted them into an asset light model - was this an unintended consequence or was it planned way in advance of the BK?)

[mbreject]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

[Jurgis]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

[mbreject]

I guess the negative SE doesn't look so bad when you look at how much they've repurchased over the years, but I just don't get why they're doing this.

[kab60]

The buybacks have created an immense amount of value for the owners. They have bought back 85 pct. of the outstanding shares since 2007. Combined with organic growth as well as a bit of M&A it has increased earnings per share from 8,5 dollar to 40,7 dollar (some five times) while net incomes has "only" doubled in the same period of time.

[kab60]

IMO management have been outstanding at allocating capital, and the urgency they display at the moment despite record high ROIC and margins are something others could learn from. Returning cash to shareholders and focusing on ROIC disciplines management and keeps them from doing stupid shit like value destroying M&A (empire building) or hoarding cash.

[oddballstocks]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

 

I believe if they retired the treasury stock they'd have positive equity.  Companies are hesitant to retire shares because then they can't be issued as options in the future.

[DooDiligence]

IMO management have been outstanding at allocating capital, and the urgency they display at the moment despite record high ROIC and margins are something others could learn from. Returning cash to shareholders and focusing on ROIC disciplines management and keeps them from doing stupid shit like value destroying M&A (empire building) or hoarding cash.

 

All that and very little goodwill on the BS

[DooDiligence]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

 

I believe if they retired the treasury stock they'd have positive equity.  Companies are hesitant to retire shares because then they can't be issued as options in the future.

 

You answered my unasked question (how could they turn SE positive? I'm such a dumbass...)

[kab60]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

 

I believe if they retired the treasury stock they'd have positive equity.  Companies are hesitant to retire shares because then they can't be issued as options in the future.

They retire most of the shares. The business is growing despite growing negative equity because their suppliers finance their inventory. If they wanted to retain earnings they could either hoard cash, par down debt or start paying their suppliers faster, but all three options would be pretty dumb.

 

If, for some reason, their suppliers strong armed them into better payment terms (as in a lot better) they would need more equity, but I don't how that would happen.

[mbreject]

The buybacks have created an immense amount of value for the owners. They have bought back 85 pct. of the outstanding shares since 2007. Combined with organic growth as well as a bit of M&A it has increased earnings per share from 8,5 dollar to 40,7 dollar (some five times) while net incomes has "only" doubled in the same period of time.

 

Thanks for the explanation, kab60. I thought they were trying to manipulate the EPS, but it didn't make sense when I saw their income increasing. I didn't think to check the difference between the growth of the two.

[DooDiligence]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

 

I believe if they retired the treasury stock they'd have positive equity.  Companies are hesitant to retire shares because then they can't be issued as options in the future.

They retire most of the shares. The business is growing despite growing negative equity because their suppliers finance their inventory. If they wanted to retain earnings they could either hoard cash, par down debt or start paying their suppliers faster, but all three options would be pretty dumb.

 

If, for some reason, their suppliers strong armed them into better payment terms (as in a lot better) they would need more equity, but I don't how that would happen.

 

It looks like generous supplier financing is the norm in the industry so maybe continued buybacks until they eat themselves completely (or Amazon, PE or dare I say it, Berkshire steps in?)

 

Either way, looks like a good business with solid management (to own for a while...)

[kab60]

The buybacks have created an immense amount of value for the owners. They have bought back 85 pct. of the outstanding shares since 2007. Combined with organic growth as well as a bit of M&A it has increased earnings per share from 8,5 dollar to 40,7 dollar (some five times) while net incomes has "only" doubled in the same period of time.

 

Thanks for the explanation, kab60. I thought they were trying to manipulate the EPS, but it didn't make sense when I saw their income increasing. I didn't think to check the difference between the growth of the two.

You're welcome. I'd actually argue the opposite (that management hasn't just bought back shares to boost EPS but to create value). Despite equities being crazy cheap after the GFC, most firms stopped buying back shares while in recent years, with record high equity prices, companies are going bonanza and buying their own merchandise at pathetic returns. Azo actually levered up a bit post GFC to buy back shares (using more more than 100 pct. of net income) while in recent years they've scaled back a bit (as a percentage of net income). I hope they go full bonanza now, but we'll see. :)

[kab60]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

 

I believe if they retired the treasury stock they'd have positive equity.  Companies are hesitant to retire shares because then they can't be issued as options in the future.

They retire most of the shares. The business is growing despite growing negative equity because their suppliers finance their inventory. If they wanted to retain earnings they could either hoard cash, par down debt or start paying their suppliers faster, but all three options would be pretty dumb.

 

If, for some reason, their suppliers strong armed them into better payment terms (as in a lot better) they would need more equity, but I don't how that would happen.

 

It looks like generous supplier financing is the norm in the industry so maybe continued buybacks until they eat themselves completely (or Amazon / PE steps in?)

Well, the CEO has some restricted stock vesting in 2025, so perhaps he's hoping to be the last man standing at that time. :)

 

If things turn south (growth turns negative, margins compress, suppliers gets more leverage) it would obviously be bad. This company is a cannibal and a cash flow monster, so if cash flows come to a halt, the owners are fucked. Don't play this for the real estate and liquidation value ala Sears. :)

[DooDiligence]

Does anyone know the reasoning behind their buybacks when their shareholders' equity's negative?

 

Because stock buybacks above book eventually turn shareholders' equity negative?  ::)

 

I believe if they retired the treasury stock they'd have positive equity.  Companies are hesitant to retire shares because then they can't be issued as options in the future.

They retire most of the shares. The business is growing despite growing negative equity because their suppliers finance their inventory. If they wanted to retain earnings they could either hoard cash, par down debt or start paying their suppliers faster, but all three options would be pretty dumb.

 

If, for some reason, their suppliers strong armed them into better payment terms (as in a lot better) they would need more equity, but I don't how that would happen.

 

It looks like generous supplier financing is the norm in the industry so maybe continued buybacks until they eat themselves completely (or Amazon / PE steps in?)

Well, the CEO has some restricted stock vesting in 2025, so perhaps he's hoping to be the last man standing at that time. :)

 

If things turn south (growth turns negative, margins compress, suppliers gets more leverage) it would obviously be bad. This company is a cannibal and a cash flow monster, so if cash flows come to a halt, the owners are fucked. Don't play this for the real estate and liquidation value ala Sears. :)

 

Nah, I'm liking the business & believe they'll still be a player in 10 years.

 

Seritage is my dead real estate bet...

[DooDiligence]

http://oppositelock.kinja.com/how-amazon-will-slowly-murder-the-auto-parts-stores-1683776505

 

I've been focused on the segment that needs parts NOW & forgot about less urgent purchases.

 

AZO management said in last CC that they don't do business with vendors who sell to Amazon (true or false?)

 

The increased deliveries to stores is causing problems (ORLY already does this well.)

[flesh]

http://oppositelock.kinja.com/how-amazon-will-slowly-murder-the-auto-parts-stores-1683776505

 

I've been focused on the segment that needs parts NOW & forgot about less urgent purchases.

 

AZO management said in last CC that they don't do business with vendors who sell to Amazon (true or false?)

 

The increased deliveries to stores is causing problems (ORLY already does this well.)

 

Nice link, I found the comments section useful, surprisingly.

 

 

[JayGatsby]

AZO management said in last CC that they don't do business with vendors who sell to Amazon (true or false?)

Haven't reviewed the exact quote but not true. I was shopping for car wash supplies at Amazon recently. All the big names in that category (Meguiar's , RainX) are for sale on Amazon. I also don't know for a fact that AutoZone sells these brands, but it seems odd that they wouldn't. Amazon is largely an internet bazaar now... if there's a product that people want that isn't available someone will track it down and sell it.

[DooDiligence]

AZO management said in last CC that they don't do business with vendors who sell to Amazon (true or false?)

Haven't reviewed the exact quote but not true. I was shopping for car wash supplies at Amazon recently. All the big names in that category (Meguiar's , RainX) are for sale on Amazon. I also don't know for a fact that AutoZone sells these brands, but it seems odd that they wouldn't. Amazon is largely an internet bazaar now... if there's a product that people want that isn't available someone will track it down and sell it.

 

It's not in there.

 

I scrubbed through it twice & listened again once.

Did the same with GPC, thinking I might have gotten my notes mixed up but it's not there either.

 

I have no idea how that got in my notes & apologize to all.

 

I did notice that NAPA (GPC) parts aren't available on Amazon.

 

and

 

AZO management says more frequent deliveries to stores has jumped up costs & they're not sure whether it's benefiting them.

 

and 2 quarters of decreasing sales has them a bit freaked out (they blame the wx & slow tax refund checks.)

(GPC blamed nothing for their lack of decreased sales.)

 

Alan Rifkin - “And my follow-up, if I may, your decision to increase your operating expense” (with stepped up store deliveries) “obviously is well documented. But certainly, when you started to do that, I don’t believe you foresaw the difficulty in the environment. What is your ability and willingness going forward, if sales continue to be a little bit below your plan; what is your willingness to cut back on some of the discretionary spending and expenses [technical difficult]?

 

Bill Rhodes - “I think there are several things in that question, Alan. First of all, as we increase this investment profile, not only the sales get weaker but several of the things that have been industry tailwinds and our financials are macro tailwinds and our financials turned against this, so it was a little bit of a double whammy. As we look at it going forward, yes, we're going to change our cost structure where we can. The biggest question we’re focused on right now is, we think there is some opportunities to decrease the multiple frequency of deliveries that we’ve rolled out over the last couple of years. Unfortunately, we've not been able to quantifiably see that we're getting a sufficient benefit out of that. So, we're going to continue to test and take some of these stores down to two times a week, we can set a three times a week and hopefully make a final decision in the next six months or so on where we will be long-term. We will pull back some of those costs. What we won’t do is pulling back cost at the point we're not providing great service to our customers. We're in this for the long-term and sometimes we're going to have periods of little bit weakness and sometimes going to have great periods of strength. We’ve got to manage this business for the long-term.”

 

---

 

Matt Fassler - “My first question relates to your thought process on the economics of some the investments that you necessarily -- you might want to pull back. What's the ROI, the financial ROI calculation that you have done to determine whether it works for you? And if you do back away, where would we see some of the investment, would it be gross margin, SG&A, CapEx et cetera?”

 

Bill Giles - “Yes. Matt, it's not as much an ROI calculation because the capital that we are deploying to do this is not that significant. We are opening these two distribution centers, not because of multiple frequency of delivery, but because we need an incremental distribution capacity. But this is more about how are we going to -- better than a breakeven on the sales environment for the operating expense increases that we have experienced. So, the vast majority of the difference will be seen in gross margins; there will be a little bit of it in the SG&A but most of it will be in gross margins.”

 

So they plan on raising prices or hammering vendors some more (the poor bastards…)

 

---

 

Opened 45 new stores in the US for a total of 5,381 and 499 stores in Mexico (plans to open 40 more over the next 2 years) and 9 in Brasil (plans to open 20 or so more whenever…)

 

“Next, I'd like to update you on our inventory levels in total and on a per store basis. Company's inventory increased 7% over the same period last year, driven primarily by new store openings, our ongoing inventory initiatives during the fiscal year and lower sales performance and plans. Inventory per location was $653,000 versus $629,000 last year, and $665,000 just this past quarter.

 

Currently operating 14 mega hubs (super sized Auto Zone’s with twice the SKU's at 80K to 100K) & building 2 more which will be ready in 2018 (plans on operating 25 to 40 of these by no stated date.) (Incremental costs will follow openings.)

 

E-commerce sales down 2% (ouch?)

 

Mexico did well in local currency but took a hit on the peso.

 

Opening more commercial accounts & said “This continues to be the most significant mid-term growth opportunity as we currently have approximately 3% market share, and we are determined to substantially enhance that over time.”

 

Feb 2016, AutoZone signed a five-year supplier agreement with JD Byrider under which it will be the preferred vendor and get priority for the supply of parts to the latter’s 170 corporate- and franchised-owned dealer locations across the U.S.

 

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[WneverLOSE]

Not sure how rational my actions are but I closed my position today after compering prices with amazon and by the few examples I looked at the price difference was much much larger than I anticipated (about 30-40% cheaper prices on Amazon which includes free shipping on some of the items).

Honestly I got really scared, maybe it's not the smartest financial decision but I will sleep better at night.

 

(P.S I'm not sure about how price sensitive people are when they need to replace something in their car, don't think most people will wait a few days in order to save a few dollars, but amazon can get scale quite quickly at the most frequently bought items, I guess that the classic 80% of revenue comes from 20% of the products apply here and than we talk about much better fulfillment time if amazon owns the inventory close to the customers)

[flesh]

Bill Giles - “Yes. Matt, it's not as much an ROI calculation because the capital that we are deploying to do this is not that significant. We are opening these two distribution centers, not because of multiple frequency of delivery, but because we need an incremental distribution capacity. But this is more about how are we going to -- better than a breakeven on the sales environment for the operating expense increases that we have experienced. So, the vast majority of the difference will be seen in gross margins; there will be a little bit of it in the SG&A but most of it will be in gross margins.”

 

So they plan on raising prices or hammering vendors some more (the poor bastards…)

 

Pushing down gross margins, moves suppliers in amazon's direction, incrementally, possibly, eventually, to a tipping point.

[DooDiligence]

Bill Giles - “Yes. Matt, it's not as much an ROI calculation because the capital that we are deploying to do this is not that significant. We are opening these two distribution centers, not because of multiple frequency of delivery, but because we need an incremental distribution capacity. But this is more about how are we going to -- better than a breakeven on the sales environment for the operating expense increases that we have experienced. So, the vast majority of the difference will be seen in gross margins; there will be a little bit of it in the SG&A but most of it will be in gross margins.”

 

So they plan on raising prices or hammering vendors some more (the poor bastards…)

 

Pushing down gross margins, moves suppliers in amazon's direction, incrementally, possibly, eventually, to a tipping point.

 

Playing the bear today.

 

"Three companies performing the same function with the same level of overhead is a recipe for disaster once all three lose their pricing power in the marketplace. What will it take for that to happen? Not that much. It all comes down to one unique service that Amazon is slowly pursuing right now: same day delivery."

 

http://www.thedrive.com/the-hammer/12258/why-the-auto-parts-retailers-will-slowly-go-extinct

 

I was thinking Amazon wouldn't want GPC due to the high % of owner / operators, but I might be wrong (would they be better off due to stronger commitment by owners?)

[Phaceliacapital]

DD, this the part about vendors you were talking about?

 

[DooDiligence]

DD, this the part about vendors you were talking about?

 

Yep, thanks.

 

If Amazon were to buy one of these guys (AZO, ORLY, GPC or AAP) I believe the market would severely rerate the others (and so might vendors...)

 

I like GPC's owner / operator model & the experience & commitment it brings.

 

Don't know if I'm not the "fool in the end" on AZO (buybacks have been tremendous...)