Engine Stalls at AutoZone

The Lampert stock is lashed after its CEO leaves and comps tank.
By Nat Worden ,

AutoZone

(AZO) - Get Report

got hit with a double whammy Monday, losing its longtime CEO and reporting a sales slump for the first month of its third quarter.

Steve Odland, the company's chairman and chief executive, is leaving the auto-parts retailer to become chief executive with

Office Depot

(ODP) - Get Report

. He will be replaced as chairman by AutoZone founder J.R. Hyde III as non-executive chairman on an interim basis. Executive Vice President William Rhodes III will be promoted to president and chief executive.

Meanwhile, the company warned that same-store sales, or sales at stores open at least a year, have deteriorated in the first four weeks of its fiscal third quarter, falling 7% from last year. The combination of travails set off alarms on Wall Street, and shares of AutoZone dropped $10.69, or 10.9%, to $87.61.

"This is a little suspicious, but not enough so to draw any conclusions now," said Morningstar analyst Phil Guziec, noting that Office Depot, a smaller company than AutoZone, seems an unlikely candidate to entice Odland. "I'm concerned about the drop in comps, and it's a little suspicious that this news comes out at the same time, but CEOs with a track record like Odland's don't get ousted over one month of weak sales.

"Promoting the operating guy internally makes sense, and I'm inclined to think that Odland was just poached away or looking for a different opportunity," Guziec added. "I don't think there's enough here to freak out (about) yet."

Odland's tenure at AutoZone, beginning in January 2001, is viewed as a success. Brought aboard by the company's activist, controlling shareholder, Ed Lampert of ESL Investments, he adopted a strategy of focusing on profits and cash flow through strict cost controls, rather than growth in sales and store counts. On his watch, AutoZone shares nearly tripled in value as of Friday's closing bell.

The strategy is recognized as Lampert's signature remedy for a retail turnaround. More recently, he employed similar methods at

Kmart

(KMRT)

, which he brought out of bankruptcy in 2003. The new Kmart shares increased five-fold in less than a year, and it recently moved to acquire

Sears

(S) - Get Report

, where Lampert also has a controlling stake, to form the third-largest discount retailer behind

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

.

Despite AutoZone's success, Prudential analyst John Tomlinson said in a research note Monday that he views the monthly sales decline as "a deterioration of the company's recent below-average comp trends."

Tomlinson said the same-store sales weakness is likely the result of underinvestment in AutoZone's stores and staffing levels, along with industrywide weakness resulting from high gas prices eating into consumer-spending levels. He has a neutral-weight rating on the stock; he does not own shares in AutoZone and his firm has no investment banking relationship with the company.

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