AutoZone Remains Neutral - Analyst Blog
June 13 2011 - 11:41AM
Zacks
We reiterate our Neutral recommendation on AutoZone
Inc. (AZO), which is one of the nation’s leading specialty
retailers of automotive replacement parts and accessories,
operating in the Do-It-Yourself (DIY) retail, Do-It-for-Me (DIFM)
commercial and other customer markets.
AutoZone released its fiscal 2011 third quarter results on May
24, 2011. The company reported net income of $227.4 million,
up 12.1% year over year from $202.7 million. EPS of $5.29
comprehensively surpassed the year-ago quarter earnings of $4.12.
Net sales improved 8.6% to $1.98 billion driven by higher sales
volume coupled with an aggressive store expansion strategy.
AutoZone uses its significant cash flow to open new stores every
year and maintain a mid-single-digit square footage growth rate.
During the first quarter, AutoZone opened 43 stores in the U.S. and
12 stores in Mexico.
AutoZone is also focused on growing same-store sales by
expanding private label offerings, which now account for 25% of
sales. This business expansion policy undertaken by AutoZone is
expected to reap long-term benefits through improved availability
and customer services.
Another important factor is the aggressive share repurchases by
AutoZone. The company repurchased 6.4 million shares of common
stock at an aggregate cost of $1.1 billion during fiscal 2010.
In the third quarter of fiscal 2011, AutoZone repurchased 1.3
million shares for $339 million, at an average price of $267 during
the quarter. At the end of the quarter, the company had $152
million remaining under its current share repurchase authorization.
Each 1% reduction in shares outstanding increases earnings growth
by 3%.
Moreover, AutoZone is the leader in the DIY retail market in the
U.S. with a 13% share. The average age of cars on the road is
rising, which is increasing the demand for auto parts.
Mexican revenues are likely to be robust due to an abundance of
old cars in Mexico and a shortage of quality parts. AutoZone aims
to tap this market potential by category management efforts and
supply-chain initiatives in the retail segment.
Thus, depending on all these factors, estimates for AutoZone
have shown upward trends following the latest earnings release,
particularly for the upcoming two quarters. Twelve out of the
eighteen analysts covering the stock for the fourth quarter
upgraded their earnings estimates in the past 30 days, causing the
Zacks Consensus estimate to go up to $6.93 from $6.80.
Similarly, ten out of the twelve analysts covering the stock for
the first quarter of fiscal 2012 increased their estimates in the
last one month. Accordingly, the Zacks Consensus estimate of
earnings went up to $4.35 from $4.22 per share.
However, the main threat to AutoZone’s performance in the near
term is rising debt on its balance sheet. AutoZone’s total
debt increased to $3.22 billion as of May 07, 2011 from $2.70
billion as of May 08, 2010.
The second threat is the increase in costs, thereby affecting
margins of the company. The recent appreciation in gas prices will
also have a negative impact on miles driven and deferment of
purchases by customers, again harming AutoZone’s business.
The third adverse aspect for AutoZone is its high reliability on
its private label brands (50%), which could hinder its commercial
business. Consequently, the company could face increased costs on
account of higher staffing levels at the stores on top of rising
occupancy costs.
Lastly, growing competition from companies like Advance
Auto Parts Inc. (AAP), O'Reilly Automotive
Inc. (ORLY) and Pep Boys - Manny, Moe &
Jack (PBY) may take a toll on AutoZone’s performance in
the coming years.
ADVANCE AUTO PT (AAP): Free Stock Analysis Report
AUTOZONE INC (AZO): Free Stock Analysis Report
O REILLY AUTO (ORLY): Free Stock Analysis Report
PEP BOYS M M &J (PBY): Free Stock Analysis Report
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