Amid a sputtering stock price, AutoZone seems to have lost some of its pizzazz among Wall Street investors. However, analysts are quick to mention that the aftermarket could see renewed trading action if AutoZone is successful with its pay-on-scan plans.
“The auto parts business is a tough business — AutoZone has made it into a sexy business,” according to Herb Greenberg, a columnist for TheStreet.com. However, he suggests that the industry has about as much sex appeal as a flannel nightgown when a player like AutoZone experiences a downturn.
“AutoZone’s a turtle dressed up to look like a hare,” says Greenberg, “and the hare costume is starting to fall off.” A speedy rise in profits is less of a given. “This is now a ‘mature’ company. It is no longer a ‘growth’ company.”
In Greenberg’s view, “Once you’re a mature company the investor thinks a different way. When you’re not a growth company people give you a lower price.” He adds that those looking for more robust returns on their investments will move on to other industries and the next hot stock — whatever they might be. This scenario could put a dent in the investment appeal of other aftermarket operations.
“It’s a slow-growth business and a slow-turn business,” Greenberg observes. “It doesn’t mean these are bad companies, but it makes it tough for everybody.”
Investor interest in the aftermarket remains in play, according to analyst John Lawrence at Morgan, Keegan & Co., Inc. “In baseball terms, the game’s not over and there are several innings left to play,” he says. “There’s a lot going on in the aftermarket to improve efficiencies. There’s more focus on the aftermarket — people see opportunities there.”
The $60 billion question
In December, AutoZone saw its largest single-day price drop since its stock debut in 1991. Shares fell $14.34, nearly 16 percent, to $77 in heavy trading on the New York Stock Exchange. Several causes may be behind the drop in AutoZone’s stock price. It has been a good performer over the years, and Lawrence thinks some investors “may be sitting on the sidelines” counting their profits. Supply pacts with enterprises such as Midas and Tire Kingdom bode well for AutoZone, he says. “Maybe some of that down-the-street business is now a commercial account.”
Last month shares in Advance Auto Parts and O’Reilly Automotive each were off 5.7 percent, while CSK Auto Corp. declined 4.5 percent. At year’s end, AutoZone’s price was $85.21 per share; CSK was just under a 52-week high at $18.77; Advance was selling for $81.40; O’Reilly was at $38.66 and Pep Boys was trading for $22.87.
AutoZone’s comp-store sales (for stores open at least a year) increased 1 percent in the company’s retail segment and 17 percent in its smaller commercial sector. The company did report a 16 percent rise in quarterly profit, but the sluggish sales figures did not sit well with Wall Street. Several analysts downgraded the stock as they questioned the quality of AutoZone’s earnings, contending that the funds were gained mostly through internal cost cutting by reducing warranty expenses and opting for a less-expensive employee pension plan rather than attracting more business through the front door.
“You can only become so efficient,” Greenberg notes. “There’s only so much that you can do” without bringing in new customers — particularly more of that $60 billion in preventative maintenance that American drivers supposedly leave undone. Some aftermarket investors see that $60 billion figure as a reachable objective for the industry, and they wonder why those motorists aren’t flocking to the stores.
AutoZone has launched several initiatives aimed at attracting more business, including a number of marketing programs, a focus on its proprietary brand offerings and the creation of light truck departments within its stores. The company also announced that it would become the title sponsor of the Liberty Bowl in its hometown of Memphis, Tenn.
Company spokesman Ray Pohlman says AutoZone executives are not commenting on the stock situation. The decision to back the Liberty Bowl was made with scant attention paid toward the stock price, but rather the main goal is to support a “community jewel” for Memphis and encourage more local sponsorships for the distinguished New Year’s Eve event, which at age 45 is one of the original tradition-filled bowl games.
Of course, many fans of college football do own cars, and the prestige and hoopla of the Liberty Bowl publicity “can’t hurt” when trying to attract more AutoZone patrons, says Pohlman.
Posturing over POS
The POS, or pay-on-scan, issue bears close watching by investors, according to Greenberg. He predicts that other aftermarket retailers will adopt the same strategy if AutoZone is successful. “O’Reilly doesn’t want to get left in the dust,” according to Greenberg, who cites the history of POS-type consignment arrangements in the grocery industry. Suppliers of quick-turning turnips like it because they get their money in a hurry — those who market cans of soup with lots of shelf life are not so hot with the delays.
AutoZone’s POS plans could see a bumpy road ahead, says Greenberg. “This isn’t Costco or Wal-Mart,” he points out. “I don’t think they’ll be able to push the manufacturers around; the manufacturers group is a solid group.”
It appears to Greenberg that AutoZone is not ready to move on POS anytime soon. “They haven’t even dotted the i’s and crossed the t’s yet,” he says, referring to AutoZone’s POS-related filings with the Securities and Exchange Commission.
Industry suppliers need to respect AutoZone’s ability to get POS in place, counters analyst Cid Wilson with Whitaker Securities. “There’s pressure on them to work with the auto parts stores,” he says, adding that he too believes the aftermarket will embrace POS once it is introduced. “It would have a much bigger bang on Advance,” Wilson maintains. “I’m bullish on Advance” for future growth opportunities, he reports. Advance and CSK “are bringing newness back into their stores,” says Wilson, and “there’s still opportunities for AutoZone to grow their stores.”
Wilson notes that the sluggish do-it-yourself sales figures in the industry are an issue to watch with some degree of concern. He discounts the impact of Wal-Mart’s role in possibly siphoning off patrons. “The people who shop at Wal-Mart are not your typical DIYers,” Wilson says.
“This is a mature industry, but it’s always been a mature industry” that bears consideration from sharp investors — especially as POS plays itself out, he says.
