Wednesday, December 12, 2001

Holiday Cheer

The man who owns AutoZone.

Posted By on Wed, Dec 12, 2001 at 4:00 AM

Maybe Memphis should call its proposed new basketball arena the Edward S. Lampert Arena. Or how about the Edward S. Lampert Pyramid? Or the ESL Liberty Bowl? Or all three? The least Memphis can do is give him a key to the city to go with the red sweater he wore at AutoZone's annual meeting Thursday. Because in four years he's bought 30 percent of our second biggest company, and at AutoZone's recent price of $73 a share, that's roughly $2.25 billion. Lampert, 39 years old, doesn't own the stock all by himself, of course. He heads an investment group in Connecticut, ESL Investments, that includes some other rich people. But he's on AutoZone's board of directors, and since 1997 he's bought 30,687,265 million shares, giving him, today, 36 times as much as company founder J.R. Hyde III. After more than five years in the stock market doldrums, AutoZone caught fire in 2001. It started the year at $25. This week it was $73. In one day last week, it gained $12, which is more than many items cost in AutoZone's 3,000 stores. That made AutoZone the No. 1 stock in the entire Standard & Poor's 500 Index this year. And it put employees and shareholders in a good mood at Thursday's meeting which featured Christmas music, an American flag, a sea of red sweaters, and a couple of rousing AutoZone cheers. "Despite what some have said, this is a very high growth, robust, dynamic industry," said CEO Steve Odland. A story you won't hear on ESPN: while stadium sponsors including Enron, PSINet, Trans World Airlines, Fruit of the Loom, 3Com, United Airlines, America West Airlines, and Conseco flirt with bankruptcy, the namesake of Memphis's AAA baseball stadium tripled its market value. What's the difference between Memphis, Houston, Baltimore, St. Louis, Miami, Boston, Indianapolis, Phoenix, and Miami? Our corporate sponsors, AutoZone and FedEx, are solvent. Several explanations have been offered for AutoZonešs big upward move, none of them very satisfactory.
  • AutoZone beat the earnings estimates of the analysts who cover it for brokerage firms. In September, their consensus guess was that AutoZone would earn 56 cents a share last quarter. In October, says Emma Jo Kauffman, head of investor relations for AutoZone, "we knew we would beat that" because sales were better and margins were higher. So the analysts bumped their estimate to 60 cents. The actual number was 76 cents, a 20-cent improvement over the starting figure. But this says as much about the murky areas of corporate accounting and "guidance" to analysts as it does about fundamentals. Clearly, it is better to beat low expectations than meet high ones as far as stock price is concerned.
  • Comparable store sales were up nine percent, "which is huge," says Kauffman. But they were up five percent in 2000, which was good enough to lead the CEO's letter in the annual report, and the stock stayed around $25.
  • CBS Market Watch opined that AutoZone "is among the handful of companies that actually stand to benefit from a weak economy" because drivers keep their old cars longer and drive more. This, however, ignores the strong new car sales this quarter because of zero-percent financing. And in an interview in September, Odland told me it is "sort of a myth" that the company does better in bad economic times.
  • AutoZone bought back 53 million shares last year. If you take shares out of circulation, earnings per share increase. But this is old news. AutoZone has been buying back as much as $400 million of its own stock as far back as 1998, and the stock generally stood still. From 1995 to 2000, it was one of the worst local stocks, with a $100 investment falling to $96.
  • AutoZone has lots of new items and is putting high-margin stuff in easy access places. Sorry, but the 2000 annual report brags about the merits of reducing store inventory by nine percent. And selling Doritos by the checkout counter, which is the new new thing at my neighborhood AutoZone store in Midtown, hardly seems revolutionary. That leaves the Edward S. Lampert Effect. Lampert, a Yale graduate, got his start at Goldman Sachs & Co., working for future Treasury Secretary Robert Rubin. "His people spent hours researching our stores," says Kauffman. He bought and waited, then bought and waited some more. By 1999 he was what is known in finance as the board and changes in management. "Good companies eventually do well in the stock market," Lampert said after the meeting. In 2000, CEO John Adams and President Tim Vargo announced they were leaving to spend more time with their families. Adams, who attended Thursdayšs shareholder meeting and by some accounts set the table for the good news of 2001, gets $575,000 a year until 2006 so long as he doesn't sell auto parts. CFO Robert Hunt is also retiring, as is director Andrew Clarkson. All of them have stock and options worth several million dollars. Odland came aboard in January, 2001. Last March, Lampert bought another seven million shares at $26. He finally sold 1.3 million shares of his holdings last week at $75. In ten years, AutoZone has grown its revenues to $4.8 billion. It was a hot stock for three years, splitting two-for-one in 1992 and 1994. Then it moved sideways for six years. This year it was hot again. What really changed was perception. That's what matters in the market, as AutoZone stockholders toast Edward S. Lampert this holiday season.
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