AutoZone Inventory: Good Lengthy Time period Prospects, However Pretty Priced (NYSE:AZO)

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Earlier this month, AutoZone (NYSE:AZO) reported Q2 earnings of ~$3.37 billion, beating the consensus estimate of ~$3.17 billion and rising 15.8% year-over-year. Similar-store gross sales had been up ~13.8% whereas adjusted diluted earnings per share elevated 49.4% to $22.30, in comparison with the consensus forecast of $17.79. The gross revenue margin fell to 53%, down 59 foundation factors Y/Y because of the worth funding initiative on chosen classes and shift in product combine in direction of business (or Professional/DIFM) merchandise. Working earnings climbed by 30.1% to ~$626.7 million in Q2 2021, up from ~$481.77 million the earlier 12 months’s identical quarter. The second quarter’s web earnings climbed by 36.4% to ~$471.8 million from ~$345.94 million.

Wanting ahead, whereas the corporate has an excellent long-term alternative to increase its DIFM or Professional-business and open extra shops, there are near-term considerations with rising oil costs and its potential impression on miles pushed. The corporate additionally has excessive DIY publicity which is predicted to develop at a slower tempo in comparison with DIFM as shoppers have much less spare time with the economic system opening up.

DIFM market share seize

Over the previous few years, AutoZone’s focus has been on rising its presence within the business or do-it-for-me (DIFM) market. Helped by administration’s efforts, the corporate was in a position to develop DIFM enterprise from ~18.9% as of the full gross sales in 2017 to 25% of the full gross sales as of the final quarter. The corporate’s professional gross sales have persistently outperformed complete gross sales development over the past a number of years (besides in 2020 because of the pandemic). In the latest quarter, the corporate’s home business gross sales jumped 32.1% versus the full gross sales development of 15.8%. This development in business enterprise was helped by a rise in transaction depend. Common weekly gross sales per program (shops that serve professionals) reached $13,500 final quarter which was a document for any Q2.

AutoZone total sales growth and DIFM sales growth

AutoZone’s complete gross sales development versus DIFM gross sales development (Firm Information, GS Analytics Analysis)

AutoZone DIFM sales as % of total sales

AutoZone’s DIFM gross sales as a % of complete gross sales (Firm Information, GS Analytics Analysis)

The corporate has a business gross sales program in most of the home shops to fortify its presence within the DIFM section. This program serves skilled prospects by offering them with business credit score and quick supply of merchandise. It now covers ~86% of the full home shops or 5,211 shops with extra anticipated to be added within the coming years.

The corporate has additionally invested within the mega-hub facility which serves as a retailer with about 100,000 SKUs in addition to a distribution centre for close by shops for fast stock replenishment. These mega hubs have outperformed business footprints on common by offering fast entry to a big number of assortments which helps them generate extra gross sales with a greater in-store buyer expertise.

The corporate at present operated 64 mega hubs and plans to open 14 extra by the top of FY23, with a long-term purpose of working no less than 100. Because of all of those efforts, the corporate has been in a position to entice professionals and acquire market share within the business enterprise. I anticipate this development will proceed within the coming years with the corporate’s plans to extend the variety of mega hubs.

Retailer development alternative

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

AutoZone total new stores and international new stores

AutoZone’s complete new retailer openings and worldwide new retailer openings (Firm Information, GS Analytics Analysis)

They plan to open 200 further new shops throughout all areas in FY2022 with 49 of them already operational. Along with the home market, the corporate additionally has significant worldwide development alternatives. The corporate is bolstering its presence in Mexico and plans to open 40-50 shops per 12 months together with new distribution centres. Administration additionally sees a giant development alternative in Brazil the place the corporate has ~50 shops after 9 years of presence. The corporate is simply getting began with growth there and administration believes it will possibly find yourself being an even bigger market than Mexico for AutoZone in the long run. Answering a query on the earnings name, the corporate’s Chairman, President & CEO William C. Rhodes stated:

So we’ve not given particular numbers, Bret, however what we’ve got stated repeatedly is in each the US and Mexico, we consider we will proceed to develop on the present sorts of ranges for the foreseeable future. So within the U.S., that is 150, 170 shops. Mexico, it is 40 to 50 shops. We consider we will try this for the foreseeable future, so it will be a lot, a lot bigger than it’s at present. So far as Brazil is anxious, we’re simply getting began. You all know we have been down there for over 9 years now, and we had been very methodical and really considerate and cautious about ensuring that this mannequin labored for us. Nearly a 12 months in the past, we introduced to our Board that we felt like Brazil was now on the stage the place we’re comfy the mannequin works. We knew it labored for the purchasers. We are actually comfy it really works for us financially, and we will likely be stemming out and rising a lot sooner in Brazil. I consider, over the long run, Brazil will find yourself being bigger than Mexico for AutoZone. However with 50-some-odd shops, it is a lengthy technique to go”

Blended macros and excessive DIY publicity

Until early this 12 months, macros gave the impression to be stepping into the best course for the corporate with the economic system opening up and folks getting out extra leading to a restoration in miles pushed. Whereas the economic system reopening will nonetheless be a tailwind for the corporate trying ahead, a brand new headwind has additionally emerged within the type of rising crude oil costs which can negatively impression miles pushed. As well as, rising inflation and Russia-Ukraine tensions may additionally dent shopper confidence who may spend much less because of this.

The corporate derives ~75% gross sales from the do-it-yourself (DIY) market which has seen good development in the course of the pandemic as shoppers had extra free time to restore their automobiles themselves. This market may see some slower development (or perhaps a decline) versus do-it-for-me market the place the corporate has a comparatively much less (albeit rising) presence. The corporate’s peer Advance Auto Elements (AAP) and O’Reilly (ORLY) derives ~60% and ~40% of gross sales, respectively from the DIFM market versus ~25% for AutoZone. So, near-term traders may want these shares in comparison with AutoZone for the following couple of years.

Valuation and conclusion

In keeping with consensus estimates, AutoZone’s income is predicted to develop ~8.25% in FY2022 and ~4.23% subsequent 12 months. It’s anticipated to publish an EPS of $111.72 within the present fiscal 12 months and $122.28 subsequent 12 months.

The corporate’s 5-year common adjusted P/E (ahead) has been 15.82x and it’s at present buying and selling at 16.69x FY22 consensus estimate and 15.25x FY23 consensus EPS estimate. Whereas I like the corporate’s long-term prospects with good DIFM share positive factors and retailer opening alternatives, I consider the inventory is pretty priced on the present ranges if we have in mind dangers from greater crude oil costs and the corporate’s greater DIY publicity in comparison with friends. Therefore, I’ve a impartial score on the inventory.

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