AutoZone Inc. (NYSE:AZO), the Memphis-based auto parts retailer, fell 11% on missed earnings Feb. 27 and took its competitors down with it. Autozone stock closed at $654.47 on Tuesday.
The company said it earned $289 million, $8.47 per share when adjusted and fully diluted, on revenues of $2.413 million. Analysts had been expecting earnings of $8.81 per share and hoping for $8.88.
The result helped send the whole auto parts retailing category down on the day. O’Reilly Automotive Inc. (NASDAQ:ORLY) was down 6.4%. Advance Auto Parts Inc. (NYSE:AAP) fell 4.4%. Genuine Parts Co. (NYSE:GPC) was down 2.4%.
AutoZone revenues of $2.41 billion, however, beat estimates, and were up 5.4% year over year. Same store sales were up 2.2%, as the company opened 40 new stores and closed just one. AutoZone currently has 6,088 stores, 5,514 of them in the U.S. and the rest in Mexico and Brazil.
Back to Basics Strategy
Along with earnings, the company announced it was selling its Interamerican Motor Corp., a distributor of parts for imported cars, to another distributor called Parts Authority, and dumping AutoAnything, an online parts retailer it bought in 2013, to Kingswood Capital Management, a private equity firm.
AutoZone opened trading Feb. 28 at $658.40 per share, a price to earnings multiple of about 15, and a market cap of approximately $18 billion, less than twice its 2017 sales of $10.88 billion. The latest results indicate a pace of $10 billion in sales, but auto parts sell best in the spring and summer, with last year’s August quarter bringing in $3.5 billion of revenue.
Auto parts are an unusually profitable area of the retail sector. AutoZone’s operating margins are near 20%, its profit margins over 10%, while retailers in other areas have trouble maintaining margins of 3%.
Auto parts sales are also rising steadily, while other goods, like sporting goods and clothing, continue to fall and many stores go bankrupt. The fact that auto parts are often returned, and many buyers need help in understanding the inventory, also helps keep out online competitors such as RockAuto and may have led to the sale of AutoAnything.
With the sale of InterAmerican and AutoAnything, neither of which had been with AutoZone for more than five years, the company is going back to its original strategy of blanketing the country with small retail outlets, many in out-parcels of strip malls. The seasonality of results should continue, with the summer months, “shade tree mechanic” season, standing in for Christmas.
How Long Can Autozone Stock Continue to Grow?
Autozone stock has been managed for steady growth, with the stock price maintained through stock repurchases. This continues, as the company spent $174.9 million during the quarter buying back 227,000 shares at $769 each. The fact that shares are now $100 below that figure would seem to be a near-term opportunity, especially as sales are bound to increase as the weather warms.
For longer-term investors, however, the view should be more cautious.
As more cars become electric, the number of parts they have goes down. As more cars become computerized, the ability of amateurs or even small shops to repair them goes down. Both these trends bode ill for the sector.
Where the turn comes is unknown, but it’s hard to see this sector growing as it has been for another decade. Unless Autozone starts distributing its profits in the form of dividends, it’s hard for me to see any long-term future in it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.