The (Nearly) Impossible-to-Replicate … AutoZone?

Auto parts retailer AZO has had unusual success with buybacks

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The (Nearly) Impossible-to-Replicate … AutoZone?

Another huge retail position is The Gap (NYSE:GPS) with 31.17 million shares in RBS Partners’ portfolio. Similar to AutoZone, The Gap has done a lot to return cash to shareholders. The company recently approved a new $1 billion share repurchase authorization, as well as an 11% increase in the annual dividend per share for 2012. Since October 2004, The Gap has distributed about $13 billion in cash to shareholders, spending more than $11 billion in share repurchases to retire 570 million shares (in fiscal 2011 alone, GPS repurchased 111 million shares for $2.1 billion). Given that The Gap currently has a market capitalization of $12.91 billion, the company has distributed its whole current market cap to shareholders since 2004.

The above was highly necessary to (try to) revitalize the share price, as The Gap has a five-year sales CAGR of -1.97% because of a big strategic error, in my opinion. Banana Republic is The Gap’s upper-scale division that tries to sell high-quality merchandise. It was doing well until The Gap decided to develop Old Navy, which caters to less affluent consumers — in effect being a company with higher-end brands that actively targets the low end of the market. Since I bought two dress shirts from Banana Republic in 2008 and discovered that their quality was more appropriate for an Old Navy label, it took me three years to go to one of the company’s stores again. Given the five-year negative sales growth, it looks like I am not the only one to have voted with his feet.

Given the unfortunate Old Navy detour, it would be difficult to turn around The Gap and refocus it to be more upscale again. This might be a retail business, but fashion is very different from auto parts. Still, this is another example of a very aggressive share buyback.

The last big bet on retail in the RBS Partners portfolio is Sears Holdings (NASDAQ:SHLD) with a current 48 million-share position. How putting two dying retailers in 2005 in the same company — Sears and Kmart — would make a more successful business operation was difficult to understand at the time, and now the skeptics have been vindicated. Cost-cutting and streamlining the business worked for a while, then the hazy strategy caught up with this problematic conglomerate, resulting in 19 consecutive quarters of declining sales.

Sears Holdings also has bought back a lot of stock — $6.4 billion, to be exact, as the program commenced in 2005. But it is one thing to be buying back stocks as the business is growing in a healthy manner, like with AutoZone, and quite another when the company is struggling to turn it around.

I am not sure how this one gets resolved. They say Sears’ real estate is where the value is, but that would be like trying to make lemonade out of a lemon idea; I seem to remember the original intention for the merger with Kmart was to compete with Wal-Mart (NYSE:WMT).

It appears that AutoZone’s success is (nearly) impossible to replicate, even for Eddie Lampert.

Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds a position in AutoZone for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the above mentioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/the-nearly-impossible-to-replicate-autozone-azo-shld-big-gps/.

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