Not all buybacks are what they seem

"Here comes AutoZone with yet another buyback," I thought as the news wire for the latest board authorization to repurchase $750 million worth of stock passed on my computer screen. I had known about AutoZone's regular buybacks for some time, but I had not considered the cumulative numbers of shares retired. When I looked at the number I was surprised to see that -- management had retired 70% percent of shares outstanding since this rather interesting financial experiment began nearly 14 years ago.Any company's share price should feel the disappearance of over the two-thirds of the float, even if business stays flat. In this case, AutoZone grew notably as the number of shares shrank dramatically. Management did a lot to break into new commercial markets, which resulted in an acceleration of sales growth.

Over the past 10 years sales show a compounded annual rate of growth (CAGR) of 5.3%, a five-year CAGR of 6.3%, and a three-year CAGR of 7.3%. Because the share count shrank consistently as the company grew, earnings per share growth was much higher than any other measure of profit growth. This is why EPS show a 10-year CAGR of 23%, while EBIT has a 10-year CAGR of 6.3%."So why doesn't everyone do what AZO does?" I was asked when discussing AZO's above-mentioned strategy. When looking at other companies in the same industry, one discovers that AZO has the highest year-over-year (YOY) revenue growth (8.6%), the highest gross (51.22%) and operating margins (18.67%), and yet the shares, at 17.66 trailing and 14 times forward earnings, are not valued above the industry average.

It does not appear that anyone else in the industry has the cash flow to try such share shrinkage as aggressively.If no one in the auto parts industry can pull it off, surely the money manager who helped engineer this financial maneuver — Eddie Lampert of ESL Investments (general partner of RBS Partners LP) — has found some other retailers that can replicate this. Perusing RBS Partners' latest 13F-HR filing shows his latest concentrated positions.One thing that jumps out immediately from the filing is how much he has cut his bet; the AZO position has "only" 2.98 million shares remaining, while as far back as 2008 the same fund had 22 million shares, which is normal under the circumstances. There are other huge positions in retail stocks and some of them are trying to pull off the same trick — increase profitability while shrinking the shares outstanding.