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AutoZone Needs to Boost Sales Growth
Thursday May 12, 1:49 am ET
AutoZone Needs to Deliver Same-Store Sales Growth in Order to Attract Investors


CHICAGO (AP) -- Shares of AutoZone Inc. won't appeal to investors who prefer their retail holdings to show growing sales at every store, but it might attract those who consider earnings more important.
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The nation's largest auto-parts retailer delivered a double dose of bad news on March 14, saying that Chairman, President and Chief Executive Steve Odland had bolted to office-supply retailer Office Depot Inc. and that sales at stores open at least one year, or same-store sales, fell 7 percent through the first four weeks of the fiscal third quarter that ended May 7.

William C. Rhodes III, previously AutoZone's executive vice president of store operations and commercial, replaced Odland as president and chief executive. J.R. Hyde III, AutoZone's founder, was named non-executive chairman on an interim basis.

The Memphis, Tenn.-based company blamed high gas prices and cool weather for the poor sales showing and said existing initiatives were expected to help the rest of the quarter.

AutoZone's stock took a hit on the news, closing March 14 at $85.75, down 13 percent from the March 11 close of $98.30. AutoZone's stock hasn't closed above $87.23 since then. It closed Wednesday at $84.53, down from its 52-week high of $99.90 on March 2, but still well above the low $20s it traded at five years ago.

"They need to get the fundamentals back on track," Friedman Billings Ramsey & Co. analyst Reed Anderson said. "If they can start to deliver same-store sales growth, that will be key. (Earnings per share) has been growing so you have to say it hasn't been too bad, but people want to see the same-store sales line moving and until that happens, it will be a drag on the stock."

AutoZone, which is scheduled to release third-quarter earnings on May 25, declined to comment.

Some market watchers believe AutoZone's is losing share to competitors O'Reilly Automotive Inc. and Advance Auto Parts Inc.

AutoZone store managers are feeling pressure from the pair, particularly in the Southeast where Advance Auto is remodeling its stores, Monarch Research analyst Cid Wilson said.

"From a customer standpoint, you see a new O'Reilly store and a new-looking Advance Auto store and you compare that with AutoZone stores where there hasn't been a whole lot of capital improvements in those stores," he said.

Smith Barney analyst Bill Sims noted that about two-thirds of AutoZone's stores are older than six years, while the same number of Advance Auto's stores are younger than that.

AutoZone plans to open about 200 stores in fiscal 2005, which ends in August, and will enter Puerto Rico for the first time. It had 3,474 stores in 48 states and 67 stores in Mexico as of April 26.

Although recent same-store sales have been lackluster, AutoZone's return on invested capital continues to rise. It was a record 25.4 percent in the second quarter, up from 24.5 percent in the year-ago period. It was 23.4 percent for the year that ended Aug. 30, compared with 19.8 percent for the previous year.

AutoZone has a store refurbishment plan and it doesn't take much money to do that type of work to an auto-parts store, Douglas Schaller, president of Schaller Investment Group Inc., which owns shares of the retailer.

AutoZone's philosophy is to maximize return on investment rather than "putting up numbers to please Wall Street," he said, which is why Schaller likes the company.

Edward S. Lampert is the wild card when it comes to AutoZone. Lampert has been a director since 1999. His investment firm, ESL Investments Inc., owned a 26.8 percent stake as of Oct. 27, making it AutoZone's largest shareholder. Some market watchers expect Lampert, who was instrumental in Kmart's acquisition of Sears, to see either that AutoZone goes private or is combined with Sears Holding Corp.

Lampert couldn't be reached for comment.