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AutoZone’s Engine Starting to Stall

Teddy

By Teddy
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Teddy

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New article out today: 

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AutoZone’s stock price is pointed in the opposite direction it’s been accustomed to for years now. Shares of the Memphis-based auto parts retailer are down more than 30 percent since the end of January. Needless to say, that’s an unusual place for the company, which continues to open new stores at a steady clip.

What’s more, negative headlines have begun to circle the once high-flying auto parts giant, which until the first quarter had enjoyed double-digit earnings per share growth every quarter, uninterrupted, for a little more than 10 years.

It’s not just AutoZone, though. Its closest competitors are reporting similar challenges at the moment, which may make it even harder for AutoZone to shake its current slump.

The Memphis company is currently listed at Rank #5 by Zacks Equity Research, which is the firm’s “strong sell” recommendation for stocks.

Dan Wewer, an analyst who covers AutoZone and other auto parts retailers for Raymond James, wrote in a research note a few days ago that he’s lowering his revenue and earnings per share outlook for the entire auto parts sector.

As The Street put it in a headline just a few days ago, “AutoZone is Running Out of Gas as Auto Parts Retailers Misfire.”

During the company’s most recent earnings presentation to analysts, AutoZone chairman, president and CEO Bill Rhodes seemed to make the case that the heady days of strong growth are behind the company – for now.

“Until our second quarter, we had consistently delivered exceptional performance marked by 41 consecutive quarters of double-digit earnings per share growth,” he said. “However, there are certain factors present today that have made it more difficult to achieve similar earnings per share growth.”

Among them is that AutoZone isn’t exactly hunkering down to ride things out. The company has chosen to accelerate its investment back into the business, which Rhodes said includes investing at an increased rate in store inventory and capital expenditures, the latter reflected in two new domestic distribution centers under construction.

The company also opened a second distribution center in Mexico in the fall, and it is increasing the frequency of deliveries to its stores from once to several times a week.

In truth, a perfect storm of outside factors are also revving up to make this year a nettlesome one for a company long used to steady, predictable growth.

First is the expansion of competition, over everything from price to parts availability, with auto stores presumably working to assemble similar assortments of products. AutoZone, Advanced Auto Parts and O’Reilly Auto Parts all boast more than 5,000 stores each in the U.S. Pep Boys has 942 across the U.S. and Puerto Rico.

With more than 15,000 stores between them across the U.S., that might make it hard to grow same-store sales, a key retail industry metric, to say the least.

In May, AutoZone reported earnings of $11.44 per share, 51 cents below Wall Street estimates. Domestic same-store sales were down almost 1 percent.

“The ongoing weakness in same-store sales means AutoZone and O’Reilly will have less operating leverage, because all those stores are carrying a lot of fixed costs,” The Street noted.

All this said, one thing that hasn’t changed is AutoZone’s philosophy, that its leadership repeats often during presentations: It is not focused on the day-to-day but setting a course for the long term.

“Our management team has been in this business for a long time, and over time we’ve been through many different cycles,” Rhodes said. “Sometimes we had tailwinds and we benefited from those, and other times we had headwinds and we have fought against them. Ultimately, we will continue to manage this business for the long term to provide great service for our customers and great opportunities for AutoZone’s owners, ultimately delivering strong shareholder value.”

 

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