AutoZone Inventory: Good Lengthy-Time period Potential, However Priced Excessive (NYSE:AZO)

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Earlier this month AutoZone (NYSE: AZO) reported second quarter earnings of ~$3.37 billion, beating the consensus estimate of ~$3.17 billion and registering year-over-year progress of 15.8%. Identical-store gross sales had been up ~13.8%, whereas adjusted diluted earnings per share rose 49.4% to $22.30 in comparison with the consensus forecast of $17.79. Gross revenue margin decreased 59 foundation factors Y/Y because of worth funding initiatives on chosen classes and a shift in product combine towards industrial (or professional/DIFM) merchandise. Working revenue grew 30.1% to ~$626.7 million in Q2 2021 from ~$481.77 million in the identical quarter final 12 months. Second quarter internet revenue elevated 36.4% to ~$471.8 million from ~$345.94 million.

Trying forward, whereas the corporate has long-term alternative to develop its DIFM or pro-business and open extra shops, there are near-term considerations with rising oil costs and its potential affect on miles operated. The corporate additionally has excessive DIY publicity which is predicted to develop at a slower tempo than DIFM as shoppers have much less free time with the opening up of the financial system.

Capturing DIFM Market Share

Through the years, AutoZone’s focus has been on increasing its presence within the industrial or do-it-for-me (DIFM) market. Helped by the administration’s efforts, the corporate was in a position to develop the DIFM enterprise from ~18.9% of whole gross sales in 2017 to 25% of whole gross sales within the earlier quarter. The corporate’s professional gross sales have constantly outpaced total gross sales progress over the previous a number of years (besides in 2020 as a result of pandemic). In the latest quarter, the corporate’s home industrial gross sales elevated 32.1%, whereas total gross sales elevated by 15.8%. This progress within the industrial enterprise was helped by a rise within the variety of transactions. Common weekly gross sales per occasion (shops serving professionals) reached $13,500 final quarter, a report for another quarter.

AutoZone Total Sales Growth and DIFM Sales Growth

AutoZone’s total gross sales progress versus DIFM gross sales progress (firm knowledge, GS Analytics Analysis)

AutoZone DIFM Sales as % of Total Sales

AutoZone’s DIFM gross sales as a proportion of whole gross sales (firm knowledge, GS Analytics Analysis)

To strengthen its presence within the DIFM section, the corporate has a industrial gross sales program in a number of house shops. This program serves skilled purchasers by offering them with industrial loans and quick supply of merchandise. It now covers ~86% of the whole home shops or 5,211 shops with extra anticipated to be added within the coming years.

The corporate has additionally invested in a Mega-Hub facility which serves as a retailer with roughly 100,000 SKUs in addition to a distribution middle for close by shops for fast stock replenishment. These mega hubs have outperformed the typical industrial footprint by offering instantaneous entry to all kinds of assortments which helps them generate extra gross sales with higher in-store buyer expertise.

The corporate at present operates 64 mega hubs and plans to open 14 extra by the top of FY23, with a long-term goal of working at the very least 100. On account of all these efforts, the corporate has been in a position to appeal to professionals and reap the advantages. Market share in industrial enterprise. I count on this pattern to proceed within the coming years with the corporate planning to extend the variety of mega hubs.

Retailer Progress Alternative

The corporate is opening new shops at a gradual tempo and had 6,785 shops on the finish of Q2 2022.

AutoZone Total New Stores and International New Stores

AutoZone whole new retailer openings and worldwide new retailer openings (firm knowledge, GS Analytics Analysis)

They plan to open 200 further new shops in all areas in FY 2022, of which 49 are already operational. Other than the home market, the corporate additionally has significant worldwide progress alternatives. The corporate is increasing its presence in Mexico and plans to open 40-50 shops per 12 months, together with new distribution facilities. Administration sees an enormous progress alternative in Brazil the place the corporate has ~50 shops after 9 years of presence. The corporate is simply getting began with enlargement and the administration believes it may grow to be a much bigger marketplace for AutoZone than Mexico in the long run. Responding to a query on the earnings name, William C. Rhodes, the corporate’s Chairman, President and CEO, stated:

So we have not given particular numbers, Brett, however what we have stated over and over is in each america and Mexico, we imagine we will proceed to develop at present sorts of ranges for the foreseeable future. So in America, that is 150, 170 shops. Mexico, it is 40 to 50 shops. We imagine we will try this for the foreseeable future, so it is going to be a lot, a lot larger than it’s as we speak. So far as Brazil is worried, we’re simply getting began. You all know we have been there for over 9 years now, and we had been very methodical and really considerate and cautious to ensure this mannequin works for us. A couple of 12 months in the past, we offered to our board that we felt Brazil was now at a stage the place we’re snug that the mannequin works. We knew it labored for purchasers. We are actually snug that it really works for us financially, and we are going to transfer and develop in a short time in Brazil. I imagine that in the long term, Brazil will likely be larger than Mexico for the autozone. However with 50-something-odd shops, it is a great distance off”

Blended Macros and Excessive DIY Publicity

As of earlier this 12 months, Macros was not off course for the corporate because the financial system opened up and extra folks had been leaving leading to miles of restoration. Whereas reopening the financial system will likely be a tailwind for the corporate to sit up for, a brand new headwind has additionally emerged within the type of rising crude oil costs which may negatively affect Miles pushed. As well as, rising inflation and Russia-Ukraine tensions might also erode shopper confidence who could spend much less consequently.

The corporate derives ~75% of gross sales from the do-it-yourself (DIY) market, which has seen respectable progress through the pandemic as shoppers had extra free time to restore their autos. This market may even see some sluggish progress (and even decline) versus a do-it-me market the place the corporate has a comparatively small (albeit rising) presence. The corporate’s friends Advance Auto Components (AAP) and O’Reilly (ORLY) account for ~60% and ~40% of gross sales, respectively, from the DIFM market, in comparison with ~25% for AutoZone. Due to this fact, near-term traders could favor these shares over AutoZone for the following few years.

Analysis and Conclusion

In accordance with consensus estimates, AutoZone’s income is predicted to develop ~8.25% in FY22 and ~4.23% subsequent 12 months. It’s anticipated to put up EPS of $111.72 within the present fiscal and $122.28 subsequent 12 months.

The corporate has a 5-year common adjusted P/E (ahead) of 15.82x and is at present buying and selling at 16.69x FY22 consensus estimate and 15.25x FY23 consensus EPS estimate. Whereas I just like the long-term prospects of the corporate with good DIFM share positive factors and retailer opening alternatives, I imagine the inventory value at present ranges is substantial if we take the danger out of upper crude oil costs and in comparison with friends. Contemplating the corporate’s excessive DIY danger. , Due to this fact, I’ve a impartial ranking on the inventory.

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