AutoZone And The Curious Case Of Debt, Value, And Online Commerce – AutoZone, Inc (NYSE:AZO) | Seeking Alpha
Shares should only be repurchased when the company has nowhere to deploy capital and the market price is lower than intrinsic value. Instead, AutoZone has been buying back shares since 1998 until today.
This article is an excellent read. Cameron Shaw does a great job of analyzing AutoZone and sheds light to what is going on in the inner circle of the company. AutoZone which has been recklessly creating debt and buying back shares no matter what the cost has put the company in a very poor situation, borrowing cash to repurchase stock instead of using liquid cash flow like their competitor O’Reilly.
Stock has tanked for this company. It is over 5 Billion in debt and comparative sales growth for same store sales is flat. Online sales are negative 3%, and the company continues not to be concerned with e-commerce. With gross profit margins at 52% it is clear that the company is at its peak. Online monsters such as Amazon are just playing with Auto Parts and did 7.5 Billion in sales last year. It is very clear to people like me that online sales will continue to grow. It is much easier for me to point and click with a mouse and have my part delivered to my home. AutoZone obviously can’t see this so declining sales are going to be the future. The company is cash-strapped so in order to drive potential sales growth they will have to lower prices and take a hit on margin to compete. This makes it extremely hard to pay the debt. Here is what I think.
Executive management has been lining their pockets as they purchase stock, buy back shares, and then sell. They have done this to do nothing more than get rich. Why would they sell out their own company?
As AutoZoners embark on their annual sales meeting this week in Memphis, TN I wonder if any of them will have the courage to ask senior management on their open question and answer session why they have borrowed money to repurchase shares to artificially inflate the price of their stock. It would also be a good question to ask Bill Rhodes (CEO) why he has purchased shares, borrowed money to buy back AutoZone stock, waited for the price to artificially increase and then sold the shares for his personal gain. This is similar to insider trading but is legal. Another question that could be asked is how is being over 5 billion dollars in debt is a good thing?. Of course that would be political suicide for an employee so if I worked there I wouldn’t do it. It does though make you think. The first line of their pledge is “AutoZoners always put Customers First.” Senior management should have their own pledge to follow. They should pledge to never let their greed create a decision that would impact the livelihood of their employees. Unfortunately it is too late.
Based on what I see, AutoZone will be soon following the likes of HHGregg, Toys R Us, Borders, Sears, Kmart, Radio Shack, Payless ShoeSource, Circuit City, Pan American Airways, Standard Oil, Montgomery Ward, F.W. Woolworth and Quiznos. Some are gone and some are still in business. They were all great companies with solid operating results at one time. They all have one thing in common. Poor decisions made at the senior management level.
How long will AutoZone survive? It’s up to the market. If AutoZone’s revenues begin to decline it will be awful tough to pay back 5 billion in debt. With online sales getting ready to take a chunk of the auto parts retailers sales it won’t be long.