AutoZone Keeps Charging Forward

There are several key metrics that are used to assess the quality of the retailers operations aside from the obvious focus on sales and profits. One is same store sales, which compares sales of existing stores year over year. This number is important because it provides information on a company's organic growth versus easier growth that can be created by opening new stores. Another is operating margin, as that reflects on management's efficiency. Reporting its second quarter sales, auto parts retailer AutoZone (NYSE:AZO) continues to prove why it's the best in the business.

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All Around Operational Excellence
For the quarter, AutoZone reported a 4% increase in sales over the comparable quarter and a 1% increase in same store sales. Net profit was up 6.4% over the same quarter in 2008.

Gross profit margin increased by 36 basis points while operating expenses were down by 20 basis points. Such operational performance crystallizes the benefits of excellent management.

It doesn't hurt that selling auto parts is a business that remains resilient during an economic downturn as more drivers opt to keep older cars longer as well promoting more do-it-yourself auto repairs. The government cash for clunkers program took a lot of old vehicles off the road, yet AutoZone managed to increase sales and profitability.

Where Do We Go From Here?
AutoZone's quarterly results are the company's 14th consecutive quarter of double digit EPS growth. The EPS figure was propelled by a 565,000 share repurchase during the quarter. In the past year, share count has declined by almost 20%. The continued improvement in operational performance along with an aggressive reduction in shares has created tremendous value for shareholders over the long run.

Shares have been on an upward climb for years; even in 2008, AutoZone was one of few companies that actually saw its shares advance.

While still its largest shareholder, Eddie Lampert of Sears Holdings (Nasdaq:SHLD) has been a net seller of shares over the past year. It's likely Lampert's decision was triggered more by cashing in on some the gains rather than a lack of confidence in the company. Currently valued at under 14 times earnings, shares look very reasonably valued in relation to other retailers without AutoZone's advantages in the auto parts segment.

Even against its competitors Advance Auto Parts (NYSE:AAP) and O'Reilly Automotive (Nasdaq:ORLY), AutoZone has the most attractive valuation. Factor in that AZO has operating margins 50% higher than AAP and twice of ORLY, and the company looks even more attractive.

Expect Hiccups
AutoZone management will be the first to tell you that a company cannot grow forever and that hiccups are to be expected along the way. In the case of AutoZone, any hiccup should be welcomed solely for the fact that it may open up the door to buy shares at a lower price of a retailer that continues to demonstrate unmatched operational excellence. (For more, check out Wheels Of Future Fortune.)

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