AutoZone’s Ongoing Streak of Beating Earnings Expectations

AutoZone (AZO), a prominent auto parts retailer, has been consistently outperforming quarterly earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More (EPS) estimates for over five years. In the face of rising new car prices and high interest rates, consumers are opting to keep their vehicles longer, leading to sustained demand for maintenance and repair products and services. As AZO prepares for a CEO transition, it remains in a strong position to capitalize on these trends and grow its market share. In this article, we will delve into AZO’s latest quarterly report, explore its growth prospects, and examine the factors affecting its stock performance.

The Auto Industry Landscape

With the average price of a new car approaching $50,000, marking a 20% increase since 2020, and interest rates at elevated levels, many consumers are choosing to hold onto their existing vehicles instead of purchasing new ones. This shift in consumer behavior has resulted in a consistent and steady demand for maintenance and repair products, providing auto parts retailers like AutoZone with a reliable revenue stream. Moreover, the average age of vehicles on American roads continues to rise, further bolstering the demand for auto parts and services.

CEO Transition and Market Expansion

As AutoZone gears up for a CEO transition next month, Philip Daniele, the current Executive Vice President of Merchandising, Marketing, and Supply Chain, is set to take the reins from Bill Rhodes, who stepped down as President and CEO in June. Mr. Daniele’s primary focus will be on expanding and growing market share for AutoZone’s domestic commercial business, often referred to as the “do-it-for-me” (DIFM) segment.

Mixed Performance in the Domestic Commercial Segment

In the previous quarter, AutoZone’s domestic commercial business faced investor disappointment as sales growth slowed to 3.9%, missing expectations, compared to the robust growth of 6.3% in Q3. However, the company rebounded in Q1, with sales growth accelerating to 5.7%. This growth is particularly noteworthy considering the challenging year-over-year comparison of 14% growth. While the DIFM segment faced a temporary slowdown, it seems to be regaining momentum.

International Expansion Gains Traction

AutoZone’s international business continues to shine, with same-store sales surging by 25.1% in the latest quarter, building upon the impressive growth of 23.3% in the year-earlier period. The company’s aggressive expansion efforts in Mexico and Brazil are paying off, with the international business contributing significantly to its top-line growth. As of November 18, 2023, AutoZone had 745 stores in Mexico, up from 706 in the previous year, and 104 stores in Brazil, compared to 76 a year ago. The company remains committed to its international growth strategy and plans to open an additional 200 stores internationally by fiscal year 2028.

Factors Affecting Stock Performance

Despite the positive aspects of AutoZone’s recent earnings report, the stock is struggling to gain significant traction. Several factors may be contributing to this muted response:

1. Recent Stock Rally

AutoZone’s stock has rallied by over 10% since late October, approaching all-time highs before the quarterly report release. It’s possible that much of the good news had already been priced into the stock, leading investors to take some profits.

2. Domestic Same-Store Sales Growth

In Q1, domestic same-store sales growth was 1.2%, remaining relatively light and in line with the previous quarter’s increase of 1.7% and Q3’s growth of 1.9%. While AutoZone is facing a tough year-over-year comparison with a solid 5.6% same-store sales growth in the previous year, the lower growth figures may be prompting investors to reassess their positions.

Bottom-line: AutoZone’s track record of surpassing earnings expectations showcases its resilience in the face of changing market conditions. With the average vehicle age expected to continue rising, the company is well-positioned to capitalize on the sustained demand for auto parts and services. As it moves forward with its CEO transition and expands its domestic and international operations, AutoZone remains a prominent player in the auto parts retail industry. While its stock may face short-term challenges due to recent gains and domestic sales figures, the long-term outlook for the company appears promising as it continues to adapt and thrive in a dynamic automotive landscape.