AZO - Autozone

[Spekulatius]

@DooDiligence: Negative BV will always look bad in a Graham investors eyes but that's mainly because Graham focused a lot on balance sheet numbers and liquidation value as a downside protection. I think that's a pretty narrow view of the investing universe and a Graham investor probably thinks that all companies with negative BV's are about to go bankrupt or something. A liquidation value will never become relevant for companies such as McDonalds, Autozone etc. They have tremendous value in their business models and earning power.

 

Book value of equity is just the value of all the quantifiable and measurable assets, i.e. cash, buildings, equipment, inventory, excess pay for acquisitions (goodwill which is in fact also just air but can boost equity) etc excluding obligations. However, something such as economic goodwill or in other words the value of the strong business model and its moat will never be stated on the asset side because it is more or less unobservale (but you can see it in the strong recurring earnings), but these unobservable assets is what generates a lot of the earning power. In such case it would be kind of waste of capital to have low debt and never buy back shares just to have a high book value of equity.

 

In short, a strong moaty business in a non-cyclical industry with highly recurring earnings doesn't require a lot of equity

 

OK, so its not like a bank or an insurer which must reserve and as long as the business has a lot of runway, it's all good?

 

I've always struggled with understanding the application of leverage, you've made it a bit less muddy.

 

I'll ponder...

 

Yes, you they use the float generated by the time lag when they pay the vendors and they get payed for general corporate purposes, but it all depends on the stability of the business model.

 

One example where it can be issue are construction companies that receive advance payments when they orders for large projects that may take years to execute. The idiot management from CBI used them for stock buybacks, but the issue is that the business is cyclical and new order intake may vary a lot. So what happens in such a case is that the companies are flush early in an order uptake, but cash starved when the business declines. Of course stock prices tend to be high when orders come in and low when dry up, so this is essentially a recipe to buy high and sell low. Then add some mismanagement with order execution and customers getting a bit antsy because you spent therm,only ona to know buybacks and you get a recipe for disaster.

 

This is unlikely in the car part distribution sector, a steady business with quicker turns, but it generally needs to be considered.

[kab60]

Someone else explained it pretty well, but the negative equity shows the strength of their business model. They don't need equity to grow since they're using their suppliers as free financing and they can thus return all of their earnings to shareholders through buybacks (while growing at the same time).

 

In a liquidation scenario there's little value for equity holders, obviously, equity is negative. But if you're playing retailers for liquidation value I think there's a discussion on Sears that might be worth looking at instead. :)

[DooDiligence]

@DooDiligence: Negative BV will always look bad in a Graham investors eyes but that's mainly because Graham focused a lot on balance sheet numbers and liquidation value as a downside protection. I think that's a pretty narrow view of the investing universe and a Graham investor probably thinks that all companies with negative BV's are about to go bankrupt or something. A liquidation value will never become relevant for companies such as McDonalds, Autozone etc. They have tremendous value in their business models and earning power.

 

Book value of equity is just the value of all the quantifiable and measurable assets, i.e. cash, buildings, equipment, inventory, excess pay for acquisitions (goodwill which is in fact also just air but can boost equity) etc excluding obligations. However, something such as economic goodwill or in other words the value of the strong business model and its moat will never be stated on the asset side because it is more or less unobservale (but you can see it in the strong recurring earnings), but these unobservable assets is what generates a lot of the earning power. In such case it would be kind of waste of capital to have low debt and never buy back shares just to have a high book value of equity.

 

In short, a strong moaty business in a non-cyclical industry with highly recurring earnings doesn't require a lot of equity

 

OK, so its not like a bank or an insurer which must reserve and as long as the business has a lot of runway, it's all good?

 

I've always struggled with understanding the application of leverage, you've made it a bit less muddy.

 

I'll ponder...

 

Yes, you they use the float generated by the time lag when they pay the vendors and they get payed for general corporate purposes, but it all depends on the stability of the business model.

 

One example where it can be issue are donsteucti9n companies that receive advance payments when they orders for large projects that may take years to execute. The idiot management from CBI used them for stock buybacks, but the issue is that the business is cyclical and new order intake may vary a lot. So what happens in such a case is that the companies are flush early in an order uptake, but cash starved when the business declines. Of course stock prices tend to be high when orders come in and low when dry up, so this is essentially a recipe to buy high and sell low. Then add some mismanagement with order execution and customers getting a bit antsy because you spent therm,only ona to know buybacks and you get a recipe for disaster.

 

This is unlikely in the car part distribution sector, a steady business with quicker turns, but it generally needs to be considered.

 

Negative equity looks better in a toll booth business.

 

Chesko182 posted this in the Liberty Broadband thread about Malone's use of leverage,

 

https://www.scribd.com/document/273949680/John-Malone-and-His-Cable-Media-Empire

 

Pretty good illustration.

[kab60]

These guys just keep killing it. Obviously a lot less attractive than during the Amazon scare in the summer of 17, but not excessive by any means (and they keep compounding value).

[mwtorock]

https://investors.autozone.com/news-releases/news-release-details/autozone-3rd-quarter-same-store-sales-increase-39-eps-0

 

Commercial accelerating again this quarter with 15% yoy growth, as compare to industry growth of 4-5%. It is not really competition between the top 3 or 4 players still at this moment as all of them combined is just 10%-12% of market share. They are still taking shares from independents or warehouse distributors.

[kab60]

Yep, fascinating really. Who would've thought something as boring as an auto parts retailer coupled with near perfect capital allocation could be such a huge winner. I excited back in December for something that seemed more attractive but this is probably something I should've just held onto.

[Okonomen]

Anyone with an opinion on LIFO vs FIFO accounting? In general I prefer the latter. AZO uses LIFO and weighted averages.

 

"Merchandise inventories are stated at the lower of cost or market. Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is not to write up inventory in excess of replacement cost, which is based on average cost. The difference between LIFO cost and replacement cost, which will be reduced upon experiencing price inflation on the Company’s merchandise purchases, was $431.1 million at May 4, 2019 and $452.4 million at August 25, 2018."

[Peregrine]

Anyone with an opinion on LIFO vs FIFO accounting? In general I prefer the latter. AZO uses LIFO and weighted averages.

 

"Merchandise inventories are stated at the lower of cost or market. Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is not to write up inventory in excess of replacement cost, which is based on average cost. The difference between LIFO cost and replacement cost, which will be reduced upon experiencing price inflation on the Company’s merchandise purchases, was $431.1 million at May 4, 2019 and $452.4 million at August 25, 2018."

 

LIFO generally provides the most up to date information on cost "latest inventory cost goes into cost of goods sold" and in an inflationary environment (which is usually the case), is the more conservative method. Of course, it also allows a company to dip more into a LIFO reserve during a period of declining costs.

[Okonomen]

Anyone with an opinion on LIFO vs FIFO accounting? In general I prefer the latter. AZO uses LIFO and weighted averages.

 

"Merchandise inventories are stated at the lower of cost or market. Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is not to write up inventory in excess of replacement cost, which is based on average cost. The difference between LIFO cost and replacement cost, which will be reduced upon experiencing price inflation on the Company’s merchandise purchases, was $431.1 million at May 4, 2019 and $452.4 million at August 25, 2018."

 

LIFO generally provides the most up to date information on cost "latest inventory cost goes into cost of goods sold" and in an inflationary environment (which is usually the case), is the more conservative method. Of course, it also allows a company to dip more into a LIFO reserve during a period of declining costs.

 

I just prefer FIFO for retailers as it minimizes the risk of stock becoming obsolete

[Okonomen]

Trying to find the gross margins for their commercial sales. Anyone got the numbers?

 

Commercial grew to 22% of total company sales in 2019. Company GM was 53,9% - up from the prior year, but I still think commercial sales have lower GM's than DIY sales, so maybe the GM improvement was more a result of product mix shift within DIY

[Okonomen]

Anyone who knows why AZO has slowly and steadily declined from their Dec19 highs? Can't really blame it on corona? ORLY started the same slide from Jan20.

[mwtorock]

Anyone who knows why AZO has slowly and steadily declined from their Dec19 highs? Can't really blame it on corona? ORLY started the same slide from Jan20.

 

Sales growth has been slow. Most of seasonal stuff that is supposed to sell more in cold winter weather did not. The warm weather this winter in the US did not help AZO for sure. However, weather effects in the long run tend to even out, and company buys more shares each quarter at cheaper prices. In the earnings call, management thinks the rest of year will grow more but we shall see.  Right now the tax refund season is very important.

[nspo]

Anyone who knows why AZO has slowly and steadily declined from their Dec19 highs? Can't really blame it on corona? ORLY started the same slide from Jan20.

 

Sales growth has been slow. Most of seasonal stuff that is supposed to sell more in cold winter weather did not. The warm weather this winter in the US did not help AZO for sure. However, weather effects in the long run tend to even out, and company buys more shares each quarter at cheaper prices. In the earnings call, management thinks the rest of year will grow more but we shall see.  Right now the tax refund season is very important.

+1

[Okonomen]

I've been looking more into AZO's debt as they have always been very credit worthy, but in a scenario with a complete US lockdown for who knows how long, they will generate significant losses together with other retailers thus breaching covenants etc.

 

They have 5,4 bUSD debt in total. All this is senior debt

 

2 bUSD undrawn credit facility which can be expanded to 2,4 bUSD.

 

Covenants on the debt is as follows: Senior debt (the 5,4 bUSD) holds no financial covenants. However, there is financial covenants on the undrawn RCF: >2,5x EBITDAR/interest and <3,25x ND/EBITDAR.

 

500 mUSD of the 5,4 bUSD matures in 2020. In Novemebr to be exact. Another 250m USD matures in 2021

 

I am somewhat worried that AZO will breach its financial covenants in 2020. So I am actually in doubt on whether or not they can refinance the 500m USD. They could use their RCF but they will probably breach one or more covenants at that time if this corona panic continues

 

However, I assume that any bank lending a company like AZO money would be very interested in keeping this customer alive since its earning power is strong and they are just hit by a very unfortunat globa lexogen factor these times like the rest of the world. If banks defaulted all customers breaching covenants due to corona they would lose most of their book and get pennies on the dollar

 

Moreover, AZO owns 50% of their sqf so there should be some sale/leaseback opportunity, ut in a covid-19 world I don't know how much cash inflow this could generate

 

Any thoughts on this? Am I worried over nothing?

[Guest roark33]

In a scenario where AZO default, lenders are going to own every business in America, which isn't a desired outcome, even for them, so I would think that covenants for almost all debt will be waived this year. 

 

The real question is for companies that need additional cash, those lenders won't want to throw good money after bad, so I think those companies will have problem.  I don't see AZO in this category. 

[Okonomen]

In a scenario where AZO default, lenders are going to own every business in America, which isn't a desired outcome, even for them, so I would think that covenants for almost all debt will be waived this year. 

 

The real question is for companies that need additional cash, those lenders won't want to throw good money after bad, so I think those companies will have problem.  I don't see AZO in this category.

 

Their 2020 Nov 500m note is also trading at 98... so I guess I'm seeing ghosts

[fisch777]

Legitimate scenario now is that many stores are forced to close for some indefinite period, workers are laid off, and Autozone stops paying rent on properties it leases.  I'm already hearing this scenario from multiple retailers.  Some shelter-in-place orders may exempt automotive repair, but not sure if that includes these stores.  Lenders may be willing to move to interest only to provide relief.

[nspo]

Hey fisch, I was speaking to my brother in law who is a mechanic. As of now, mechanical/automotive is deemed as an essential and staying open. That doesn't speak for every mom and pop but he mentioned that all the major suppliers (azo,orly) are open and delivering parts.

[Castanza]

Hey fisch, I was speaking to my brother in law who is a mechanic. As of now, mechanical/automotive is deemed as an essential and staying open. That doesn't speak for every mom and pop but he mentioned that all the major suppliers (azo,orly) are open and delivering parts.

 

I was at the Toyota Dealership yesterday and it was as packed as ever. They took precautions in the waiting rooms and at the front desks, but it was business as usual (with some extra sanitation)