Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 2Q18 Earnings Update
Prev. Ed.: 2Q18 Earnings Flash Update, Feb 27, 2018.
Brokers’ Recommendations: Positive: 40% (8); Neutral: 60% (12 firms); Negative: 0% (0) Prev. Ed.: 5; 13; 0
Brokers’ Target Price: $790.46 (↑$26.96 from the last edition; 11 firms) Brokers’ Avg. Expected Return: 28.2%
Portfolio Manager Executive Summary
AutoZone, Inc. (AutoZone or the company), headquartered in Memphis, TN, is a leading retailer and distributor of automotive replacement parts and accessories in the United States. The company serves products for cars, sport utility vehicles (SUVs), vans and light trucks including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. AutoZone also sells ALLDATA brand diagnostic and repair software through www.alldata.com and alldatadiy.com.
Of the 20 firms in the Zacks Digest Group covering the stock, eight provided positive ratings and 12 assigned neutral ones. None of the firms provided a negative rating to the stock. Of these 20 brokerage firms, 11 provided target prices.
Positive or equivalent outlook (8/20 firms or 40%) – The bullish firms expect AutoZone’s inventory management initiatives to drive earnings and revenue growth over the next few years. Increasing revenues are helping the company to invest in supply chain initiatives that will boost its commercial market share. The DIFM business is likely to continue to benefit from expansion of the company’s frequent parts delivery program. The firms expect the company to benefit from relative strength in the industry’s DIY segment and also from the rollout of its new distribution strategy and a move toward more direct sourcing. According to the firms, the company’s efforts to introduce inventory and supply chain-related initiatives will boost sales.
Neutral or equivalent outlook (12/20 firms or 60%) – The cautious firms believe that the company is gaining from store expansion, new megahubs, low gas prices, improved inventory availability, focus on the U.S. market and international expansion. Moreover, AutoZone plans to source more global parts directly, rather than through a third-party partner, which should reduce product acquisition costs and drive gross margin. They project yearly revenues and earnings growth to be driven by stronger industry sales growth. However, larger effective tax rate might hamper earnings in the coming quarters. The firms believe that increased investments in order to penetrate deeper in the commercial segment will add to expenses. They also think that the company’s high DIY mix will result in slower growth compared to peers. This is because the segment grows slower than the commercial segment. In FY18, the firms expect SG&A to be a drag on operating margin along with pricing pressure at the gross profit. This margin pressure is likely to stem from wage inflation, growth investments and increased mix of lower margin commercial sales offset by lower tax.
Apr 12, 2018
Overview
Based in Memphis, TN, AutoZone, Inc. (or the company) is a retailer of automotive parts and accessories. As of Feb 10, the company had 5,514 stores across 50 states, the District of Columbia and Puerto Rico in the United States, 532 stores in Mexico, 16 in Brazil and 26 IMC branches. Thus, the total store count was 6,088 as of that date.
These typical stores offer a range of hard parts, maintenance items and accessories for cars, sports utility vehicles, vans and light trucks. The stores cater primarily to the DIY consumers along with an emphasis on commercial or DIFM customers. AutoZone also sells the ALLDATA brand diagnostic and repair software and offers auto and light truck parts along with online diagnostic and repair information through www.autozone.com. The company does not derive revenues from automotive repair or installation services.
The firms identified the following investment merits and drawbacks of AutoZone:
Key Positive Arguments / Key Negative Arguments· AutoZone has several stores in different locations. This increases accessibility and enhances sales ratio and profit margins.
· AutoZone delivers services online and provides purchase facilities too. This boosts the company’s margin ratio.
· AutoZone’s strong free cash flow supports share buybacks and store footage growth.
· Increased focus on store-level execution, renewed merchandising discipline and a new front-end software package helps AutoZone maintain its market share. / · Any rise in fuel costs could reduce the number of automobile miles driven. This could negatively impact the company’s business.
· AutoZone has made significant investments in its commercial business. As a result, the company will suffer if it fails to penetrate the commercial parts market.
The company’s website is http://www.autozone.com/. Its fiscal year ends Nov 22.
Apr 12, 2018
Long-Term Growth
AutoZone is the largest specialty retailer of automotive parts and accessories in the United States. The firms believe that it has the ability to help in the consolidation of the industry. Moreover, as the company increases its scale, its parts availability will rise. This should attract more customers and boost its sales. Further, the increase in scale will help AutoZone get better payment terms and thus, reduce its working capital requirement.
The firms also believe that investment in commercial programs and the IMC acquisition will be beneficial for AutoZone in the long term. The company incorporated its commercial sales programs in 5, 915 domestic stores as of May 6, 2017. These stores provide commercial credit and prompt delivery of parts and other services to local, regional and national repair garages, dealers, service stations and public sectors. The company’s efficient capital and expense management are also expected to support its long-term growth plans.
AutoZone utilizes a significant amount of its cash flow to launch stores every year and aims to maintain a low single-digit square footage growth rate. During 2Q18, AutoZone opened 35 stores and closed one outlet in the United States while inaugurating three in Mexico and two in Brazil. As of Feb 10, the company had 5,514 stores across 50 states, the District of Columbia and Puerto Rico in the United States, 532 stores in Mexico, 16 in Brazil and 26 IMC branches.
AutoZone plans to optimize its performance in the coming years by focusing on the delivery of high quality merchandise at proper prices to each store. The initiatives undertaken for long-term sustainability are 1) efficient utilization of capital; 2) product assortment in each store, which will increase customers’ utility; 3) investment in new store development and reconstruction of the infrastructure of existing stores; 4) one-team strategy; based on management’s belief that great people provide great services; 5) deploying inventory effectively through continual improvement in hub strategy; 6) improving the retail website and the new commercial website.
The average age of cars on U.S. roads is rising, creating an increase in the demand for auto parts. Moreover, low fuel prices are boosting miles driven, leading to more failure and maintenance-related demand for both the DIY and DIFM businesses. Even revenues from Mexico are likely to be robust due to an abundance of old cars in the country and a shortage of quality parts. AutoZone aims to tap this market potential through category management efforts and supply-chain initiatives in the retail segment.
Apr 12, 2018
Target Price/Valuation
Provided below is a summary of target price/valuation as compiled by Zacks Digest:
Rating DistributionPositive / 40%↑
Neutral / 60%↓
Negative / 0%
Avg. Target Price / $790.46↑
Digest High / $900
Digest Low / $720↑
Upside from Current / 28.2%↓
No. of Firms with Target Price/Total / 11/20↑
The target price is susceptible to risks that may arise from multiple factors like worse-than-expected slowdown in DIY comparable store sales (comps), led by a shift in consumer preferences from lower cost DIY to the higher cost DIFM, volatile gasoline prices, depressed new car sales resulting from sustained levels of high unemployment, along with threats from its peers, especially O’Reilly Automotive.
Jan 23, 2018
Recent Events
On Feb 27, 2018, AutoZone earnings per share of $10.38 for 2Q18 (ended Feb 10, 2018), beating the Zacks Consensus Estimate of $8.81.Operating profit rose to $205.1 million from $384 million in the 2Q18.
Revenue
AutoZone reported revenues of $2.41 billion in 2Q18, up 5.4% from 2Q17. Also, the top line surpassed the Zacks Consensus Estimate of $2.39 billion.
Domestic same-store sales (sales for stores open at least for one year) rose 2.2% in 2Q18. Sales per average store amounted to $380,000 compared with $372,000 in 2Q17.
Revenues from Total Auto Parts (including the domestic, Mexico, Brazil businesses and IMC) increased 5.7% to $2.33 billion in 2Q18 from $2.2 billion in 2Q17. Total Domestic Commercial Sales rose 5.7% to $455.9 million from 2Q17. Revenues from the All Other segment comprising ALLDATA, the e-Commerce business and Auto Anything inched down 2.6% to $81.5 million from $83.7 million in 2Q17.
AutoZone opened 35 stores and closed one outlet in the United States and three in Mexico and two stores in Brazil during 2Q18. As of Feb 10, the company had 5,514 stores across 50 states, the District of Columbia and Puerto Rico in the United States, 532 stores in Mexico, 16 in Brazil and 26 IMC branches. Thus, the total store count was 6,088 as of that date.
Outlook
The company expects improvement in sales for the year 2018. The bullish firms see rising potential for AutoZone’s revenue growth as the company has started investing in supply chain initiatives to increase its commercial market share. Moreover, revenue growth in the aftermarket sector is likely to be supported by low gasoline prices, which lead to increasing miles driven. The company’s DIY segment has shown strength and may further push revenues up.
Margins
Gross profit rose to $1.28 billion (or 52.9% of sales) from $1.2 billion (or 52.7% of sales) in the prior-year quarter. The figure was flat due to higher merchandise margin and lower distribution costs. Cost of sales went up to $1.13 billion in 2Q18 from $1.08 billion in 2Q17.
Operating profit rose to $205.1 million from $383.9 million in 2Q17. Operating expenses as a percentage of sales, rose to 44.4% from 35.9% a year ago.
Outlook
Management believes the gross margins can expand in both retail and commercial businesses. However, the margins of the commercial business, which is growing at an accelerated rate, are lower which are expected to put pressure on the overall margins.
Most firms expect AutoZone’s margins to be strained due to wage inflation, growth investments and increased mix of lower margin commercial sales offset by lower tax.
Earnings Per Share
On Feb 27, 2018, AutoZone reported earnings per share of $10.38 for 2Q18 (ended Feb 10, 2018), beating the Zacks Consensus Estimate of $8.81.
The tax rate over the trailing four quarters, having ended Feb 10, 2018, was 29.9%, lower than the 34.4% rate for the preceding four quarters ending Feb 11, 2017.
Outlook
No specific guidance for EPS has been provided by the company. The firms anticipate EPS to remain depressed (in the single digits) at least in the near term.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet & Cash Flow
AutoZone had cash and cash equivalents of $288.5 million as of Feb 10, 2018, up from 210.6 million as of Feb 11, 2017. Total debt amounted to $5 billion as of Feb 10, 2018, down from $5.15 billion as of Feb 11, 2017. Accounts payable were $4.4 billion as of Feb 10, 2018 compared with $4.1 billion as of Feb 11, 2017. The company had stockholders’ deficit of $1.3 billion as of Feb 10, 2018, down from $1.8 billion as of Feb 11, 2017.
During the first three months of FY18, AutoZone generated net cash flow of $146.3 million before share repurchases and changes in debt compared with $59.7 million in the first three months of fiscal 2016. Capital spending increased to $104.5 million from $118.2 million a year ago.
Inventory
AutoZone’s inventory grew 4.7% y/y in 2Q18, driven by store openings and increased product placement. Inventory per store increased to $671,000 from the year-ago level of $665,000.
Accounts payable to inventory ratio was 106.9% as of Feb 10, 2018, up from 105.5% as of Feb 11, 2017.
Share Repurchase
In 2Q18, AutoZone repurchased 227,000 shares for $174.9 million, reflecting an average price of $769 per share. The company had shares worth $296 million left for repurchase at the end of the quarter.
Analyst / Payel DharCopy Editor / Subhojoy Ghosh
Content Ed. / Sanjoy De
Lead Analyst / Sanjoy De
QCA / Anindya Barman
No. of brokers reported/Total brokers / 11/20
Reason for Update / 2Q18 Earnings Update
Apr 12, 2018
Zacks Investment Research Page 2 www.zackspro.com