Advance Auto Parts and AutoZone are two leaders in the automotive parts and accessories retail industry. Both companies are performing well during the downturn in the economy as car owners hold onto their vehicles for longer periods and perform their own repairs in attempt to save costs. These two companies are prime examples of companies that perform best when the economy grows weaker. While uncertainty remains on the status of the economy’s recovery, a deeper look into the financials of these companies may clarify the sustainability of their improving profits.
Advance Auto Parts (AAP) is continuing to see improvements on profit margins since the beginning of the economic downturn, steadily increasing from 4.63 percent in 2008 to 5.84 percent in 2010. Also, comparable store sales are increasing as well which is another indicator that the company is generating greater profits during this period. AAP activity ratios are stable as well. There are no immediate liquidity concerns, but the balance sheet does indicate that AAP appears to be generating its financing from debt rather than equity. In fact, account payables and long-term debt steadily rose in 2010 to an atypical level, but its debt ratio still remains to be manageable. Also, AAP is actively buying back shares, which is also amplifying the increase of EPS investors have seen the past couple years.
AutoZone (AZO), like AAP, is continuing to generate substantial profit margins during this time, maintaining approximately 10 percent each year. Also, improving comparable store sales for AZO indicate greater profits, although it is not quite reaching the levels of comparable store sales of AAP. The income statement does not reflect the reported increase in EPS though. Like AAP, AutoZone is heavily buying back shares, which is the main contributor to increasing earnings on a per share basis. In fact, AZO is